No one knows when oil prices will bottom, but if you’re looking to play that eventuality, you can do a lot worse than ConocoPhillips (COP) and the huge dividend yield that comes with COP stock.
Like all energy stocks, COP is trading along with prices for crude oil. That’s made it volatile of late and means shares will never recover until the oil market finds a floor.
Rest assured, prices will bottom — eventually. Yes, China isn’t growing by leaps and bounds anymore. The commodities supercycle is dead and buried.
But oil, natural gas, copper, iron ore — you name it — are still cyclical, and so are plays like ConocoPhillips stock. The end of the supercycle didn’t repeal the laws of supply and demand.
Furthermore, declining global demand — thanks primarily to depressed emerging markets — has been understood for some time. At this point in the cycle, the rout in oil prices is a supply issue. There’s a good old-fashioned glut.
That should be good news. Cutting production is easy … it’s just not happening. OPEC is in production overdrive. Saudi Arabia is at record levels. All of this is to maintain market share.
COP Set for Outperformance
It could takes days, weeks, months or even years, but at some point the supply-demand equation will shift. That’s why it’s known as a cyclical phenomenon, and we might just be seeing the first stirrings of the boom (well, recovery) after the bust.
Oil jumped Thursday because of a report that OPEC is considering a production cut. COP stock rallied in concert. Maybe this is the end, maybe the move is yet another feint. Either way, COP is worth holding because of its combination of both its valuation and its payout.
Lots of independent oil and gas exploration companies look cheap if you take the long view, but COP stock has certain advantages over other names. For one thing, COP isn’t just the largest company in its industry, it also pays one of the highest dividend of any stock in the S&P 500.
Even after Thursday’s spike in oil prices — and, by extension, ConocoPhillips stock — the yield stood at 8.65%. We’re talking junk-bond type levels here.
But make no mistake, COP stock is no junk bond. Importantly, the dividend is safe. Cash flow and cash on the books are trending downward, but COP has an ample cushion to keep the dividend afloat.
In addition to the income stream, COP stock offers the possibility of serious price appreciation when oil prices reverse. After all, shares are down 40% over the last 52 weeks.
A safe and massive dividend, depressed valuation and premier position in its sector gives ConocoPhillips the wherewithal to make it through the storm and provide some serious outperformance when the sun once again shines.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
