Dividend Analysis - ConocoPhillips (NYSE:COP)
19 November 2007Continuing from my analysis of Exxon Mobil Corporation, Dividends Matter reader Frog had suggested ConocoPhillips which trades on the NYSE under the symbol COP. Let’s see if this stock deserves a spot in our portfolio of superior dividend yielding stocks.
Company Profile:
From Yahoo Finance
ConocoPhillips operates as an integrated energy company worldwide. It operates through six segments: Exploration and Production, Midstream, Refining and Marketing, LUKOIL Investment, Chemicals, and Emerging Businesses. The Exploration and Production segment explores for, produces, and markets crude oil, natural gas, and natural gas liquids. It also mines deposits of oil sands in Canada and upgrades into a synthetic crude oil. The Midstream segment gathers and processes natural gas; and fractionates and markets natural gas liquids in the United States and Trinidad. The Refining and Marketing segment involves in the refining of crude oil and other feedstocks into petroleum products, such as gasoline, distillates, and aviation fuels; and buying, selling, and transporting crude oil and petroleum products in the United States, Europe, and Asia Pacific. The LUKOIL Investment segment consists of 20% interest in OAO LUKOIL, an international integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics. It offers ethylene, propylene, and other olefin products; aromatics products, such as benzene, styrene, paraxylene, and cyclohexane; polystyrene, and styrene-butadiene copolymers; and specialty chemical products, including organosulfur chemicals, solvents, catalysts, drilling chemicals, mining chemicals, and high-performance polyphenylene sulfide polymers and compounds. The Emerging Businesses segment engages in the development of new businesses, including new technologies. It focuses on the power generation; carbon-to-liquids; technology solutions, such as sulfur removal technologies; and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.
Market capitalization is $126.25B.
Company Fundamentals:
As usual, let’s check up on management first. Looking at the return on invested capital, management has been all over the map. From a low ROIC of 1.5% in 2002 to a high of 21.5% achieved in 2005. Definitely tough to see any consistency in these numbers. The 5 year average ROIC is 12.9%.
Return on equity has averaged out to be consistent with the 10 year average ROE of 16.7% compared with the 5 year average ROE of 16.54%. Definitely a decent ROE (although significantly lower than XOM).
Equity growth rate has been remarkably constant. The 9 year equity growth rate is 23.27%. The 5 year rate dips to 21.49%. The 3 year rate hangs in at 25.75%. And last year’s equity growth rate was 31.19%.
Earnings per share growth rate has been more volatile. The 9 year rate is 27.87%. The 5 year rate skyrockets to 42.26%. The 3 year rate hangs up there at 41.5%. But last year’s rate dropped to -4.04%! Ouch.
And its easy to see why. The sales growth rates have been excellent, but dropping. The 9 year rate is 40.49%. The 5 year rate moves up to 46.99%. The 3 year rate drops to 24.13%. And last year’s sales growth rate plunged to 3.19%.
Dividend Fundamentals:
Current dividend yield is 2.08%. That is slightly above the dividend yield of the S&P 500 Index (1.99%) but lower than the dividend yield on the DJIA (2.37%). Looks like an average dividend yield.
The dividend growth rate has been erratic over the years, although the last 2 years have been absolutely amazing. From 1998 to 2001, the dividend growth rates were 1.49%, 0%, 0%, and 2.94%. Absolutely dismal. The last 2 years have been 31.84% and 22.03%. I prefer to see consistency in my growth rates. That give me the feeling that I can trust management to continue increasing my dividends in a predictable fashion. This dividend growth history doesn’t give me that nice and warm feeling.
One good thing is that the dividend payout ratio has dropped significantly to last year’s 15.53% payout ratio. There is lots of room for dividend growth.
Cash flow growth rates have been excellent (except for 2006). The 9 year rate is 17.81%. The 5 year rate jumps to 38.14%. The 3 year rate stays high at 32.8%. But last year’s cash flow growth rate dropped to 6.53%. This is right in line with the drop in sales growth rates and the EPS growth rate.
Valuation Models:
Let’s use our 3 models to come up with a fair price for this stock.
Using the average high dividend yield model, I looked at the last 10 years worth of dividend yield data. The 10 year average high dividend yield is 3.24%. The 5 year average high dividend yield drops slightly to 3.05%. If I demand the 5 year yield, then my model price works out to $53.77. At the current price of $78.93, Mr. Market is demanding a premium of 46.79%.
Mr. Graham would argue that point! The Graham number worked out to $101.28 or a discount of 22.07%! Wow. Even Graham agreed that XOM was selling at a 46% premium.
For the discounted present value model, I used the following inputs:
- future EPS growth rate of 9.9% (My initial estimate came out to 21.49% which is the 5 year equity growth rate. However, analysts have forecast 9.9%.)
- future P/E of 8.69 (This is the current P/E and is slightly below the 5 year average P/E of 9.39.)
- dividend yield of 3.05%
- future dividend growth rate of 8.01% (This is the 9 year dividend growth rate.)
With this information, my model price worked out to $74.24 or a premium of just 6.31%.
Here is my dividend analysis of COP.
Here is the 1 year stock price chart:
Not as pretty a chart as XOM. Quite a bit more volatility in the price.
Conclusion:
This was an interesting analysis. Comparing both XOM and COP, I prefer the company fundamentals of XOM over COP. More consistency.
However, from a valuation perspective, COP seems to be more of a value considering that two of the methods have it selling at close to fair market value or a discount.
However, for me, the historical dividend growth rate does not provide the consistency that I am looking for in a dividend yielding stock. So I will have to pass on COP.
What are your thoughts on this stock?
Full Disclosure: I do not own shares in COP.
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on November 19th, 2007 at 9:32 am
I would also highly consider XOM before COP. I’m a huge believer in dividend growth and you are correct that consistency in the dividend growth rate is key.
Great job!
on November 19th, 2007 at 5:49 pm
If you were to compare XOM and COP with PCA.TO today which of the three would you pick?
Looking at a your post from one month ago it seems that PCA is getting closer to your Graham number and the the dividend yeild model price. Based only on the model prices the premium on PCA is lower than the other three (with the exception of COP’s Graham number).
Based on fundementals I would assume you still prefer XOM over COP and PCA
on November 19th, 2007 at 9:26 pm
When choosing stocks, I want to make my choices based on the fundamentals. From that point, I would prefer XOM to either COP or PCA.
Once I identify a company with fundamentals that I like, then I am able to use the model prices to find a fair price (and hopefully limit my downside).
I am still looking for an energy company that jumps out at me. So the search continues!
on November 21st, 2007 at 1:22 am
Superior dividend yielding energy stock TOTAL ( TOT )
on January 8th, 2008 at 5:11 pm
Hey there - I’m new to your site and love your methodology of rating companies! Quick question: How do you get 10 year history on these companies? Many of the SEC filings on these companies websites only go back several years and I can’t seem to find a site that’ll help me that that info.
Thanks!
on February 13th, 2008 at 11:55 am
HI, COULD YOU CHECK ENI (NYSE CODE : E). IT IS THE LARGEST OIL COMPANY OF ITALY. EXCELLENT YIELD (4%) AND DIVIDENT GROWTH. CURRENT RATIO AROUND 1 AND D/E RATIO ONLY 0.38. ALSO P/E AROUND 4 AND P/S RATIO 0.385. PRICE/BOOK VALUE 0.778 AND CASH/SHARE 7.66…. STRONG FUNDEMENTAL PLUS GOOD DIVIDENT PAYER. KINDLY ADVISE IF ENI WOULD BE PART OF YOUR SUPERIOR STOCK PICKER. THANKS
on March 1st, 2008 at 2:49 pm
Could you analyze Chevron (CVX)? It is currently the top holding in the Vanguard Dividend Appreciation ETF. Thank you.