Stock Analysis: ConocoPhillips (COP)

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, natural gas, natural gas liquids, liquefied natural gas and bitumen on a worldwide basis. This dividend achiever has paid dividends since 1934, and has increased them for 12 years in a row. Back on May 1, 2012 ConocoPhillips split in two separately traded companies – ConocoPhillips (COP) and Phillips 66 (PSX).

The data presented below shows the ten year financial trends for legacy ConocoPhillips, as accounting records had not been updated going back 10 years for just ConocoPhillips. ConocoPhillips is the upstream operations, which are involved in exploration and production of oil and natural gas. Phillips 66 (PSX) represented downstream operations such as operating refineries in US and abroad, as well as transportation assets such as pipelines.

 The company’s peer group includes Exxon Mobil (XOM), Chevron (CVX)) and British Petroleum (BP). Over the past decade this dividend growth stock has delivered an annualized total return of 15.50% to its shareholders.

The company has managed to increase EPS from $0.74/share in 2002 to $8.97 by 2011. Analysts expect ConocoPhillips to earn $6.06 per share in 2012 and $6.26 per share in 2013.

 The average return on equity has remained around 20% for most of the time, with the exception of the 200 7 -2008 run up in oil prices, followed by the 2008 – 2009 decline. Since then, it has increased back up to 20% in 2011. I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 14.20% per year over the past decade, which is lower than the growth in EPS. A 14% growth in distributions translates into the dividend payment doubling every five years on average. If we look at historical data, going as far back as 1982, one would notice that the company has actually managed to double distributions every ten years on average. The dividend payout ratio has mostly remained below 50%, with the exception of 2002 and 2008- 2009 periods. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently ConocoPhillips is attractively valued at 7.20 times earnings and has a sustainable distribution. In comparison Exxon Mobil trades at 9.20 times earnings and yields 2.60%, while Chevron trades at 9 times earnings and yields 3.30%. I am considering replacing Exxon Mobil with ConocoPhillips. 

Full Disclosure: Long XOM and CVX

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- Exxon Mobil’s Stingy Dividend Payout

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