Major oil company ConocoPhillips (COP) pays one of the fattest dividends around, with a current dividend yield of 5.6%.
But with the price of crude oil still stubbornly below $50 per barrel, how safe is that dividend?
And for that matter, is COP stock even worth bothering with in this market?
ConocoPhillips CEO Ryan Lance said that the company was committed to a “compelling payout,” which most investors took to mean that the dividend was safe for the time being. And as recently as July, ConocoPhillips actually raised its dividend by a penny per share.
But is it sustainable?
Let’s take a look, shall we.
COP Stock by the Numbers
COP stock reported its third-quarter earnings last week, and the numbers weren’t particularly encouraging. COP stock lost $1.1 billion in the third quarter, or 87 cents per share. A year ago, the company earned $2.7 billion, or $2.17 per share. Tthat’s quite a turn for the worse.
Stripping out some one-time charges, ConocoPhillips stock posted a loss of 38 cents per share, meeting the analyst consensus estimate. Those numbers aren’t inspiring, but they are more or less in line with the numbers being released by other oil majors.
With the price of crude scraping along under $50, it’s a nasty time to be in the oil business.
Still, investors seemed to like what they heard from management. Operating costs were down 18% year over year. ConocoPhillips shaved an extra $800 million off of its capital expenditures budget for the year, dropping it from $11 billion to $10.2 billion.
And in a pretty significant move, management said that ConocoPhillips would be exiting its expensive deep-water operations. So, COP will certainly finish this year a leaner, more efficient competitor.
But is it enough?
Let’s dig into the nitty-gritty.
While net income, cash flow from operations and free cash flow have all been largely trending downward (see chart), COP stock has a lot of cash to burn before this really becomes a serious problem. ConocoPhillips had $2.4 billion in cash and equivalents at the end of last quarter. That’s down from $3.8 billion last quarter and $5.4 billion a year ago. But it’s more than enough to keep the company afloat for the foreseeable future.
And we shouldn’t forget that, despite all of the spending cuts, ConocoPhillips actually managed to raise output this quarter by 4%.
Like the rest of Big Oil, ConocoPhillips got a little sloppy during the years of high oil prices and allowed operating costs to rise. But now that lower prices are forcing discipline, COP is finding it can do more with less.
So, to answer our first question, yes. The ConocoPhillips dividend is safe for the foreseeable future. But what about the second question: Is COP stock is worthwhile to own at current prices?
That’s a harder question to answer. The dividend yield alone makes the stock interesting, though a 5.6% dividend is hardly consolation when you’ve lost about 20% year-to-date due to share price losses.
Looking at the Shiller price-to-earnings ratio, or the cyclically adjusted price-earnings ratio (“CAPE”), we certainly see a cheap stock. At a CAPE of less than 9, COP stock is among the cheapest in the S&P 500.
Ultimately, it will likely be crude oil prices that make or break COP stock. ConocoPhillips can limp along for years with crude oil at current prices, keeping its dividend intact. But here we are talking about a company that is simply treading water, and a cheap stock can remain cheap for years without a catalyst to drive it higher.
That catalyst needs to be a higher crude oil price. In my view, $60 to $70 oil is “about right,” but it could take months or years to get there.
So, if you buy COP stock today, you’d better be patient!
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
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