Energy stocks aren't necessarily the first place income investors look for yields.
Tethered to commodity prices and the vagaries of geopolitics, the sector can be volatile. The Energy Select Sector SPDR Fund (XLE) has gained about 11% in 2019, but has a five-year annual return of minus 2.75%, compared with 10.6% for the S&P 500 (.SPX).
And yet there are some encouraging signs for energy stocks, including Exxon Mobil (XOM) and Chevron (CVX), when it comes to emphasizing capital returns, dividends in particular. Just don't pencil in routine double-digit dividend increases.
For exploration and production outfits, "expect 2019 budgets to offer a consistent message of capital discipline, with cash generation and returns prioritized over growth," says a recent note by Devin McDermott, an equity analyst and commodities strategist at Morgan Stanley .
Another reason for cautious optimism: West Texas Intermediate crude was recently trading at around $53 a barrel, some 20% above its recent low in late December. Brent crude, more of a global indicator, was at a little more than $62 a barrel, about 20% above its late 2018 lows.
Exxon Mobil and Chevron, the largest global integrated majors on a list assembled by Barron's, yield 4.4% and 4%, respectively.
More disciplined capital spending in the sector should help maintain and grow dividends.
|Company||Ticker||Recent price||Market value (bil)||Dividend yield||1-year return||Payout ratio*||Sector|
|Exxon Mobil||XOM||$75.40||$314.00||4.4%||2.8%||68%||Integrated Major|
|Murphy Oil||MUR||27.35||4.6||3.7||3.6||79||Exploration & Production|
|ConocoPhillips||COP||67.45||76.0||1.8||28.4||26||Exploration & Production|
|Marathon Oil||MRO||15.45||12.8||1.3||-2.8||28||Exploration & Production|
All data as of Feb. 12; *Based on most recent fiscal year | Source: FactSet
The two companies have developed a reputation for prioritizing dividends over share buybacks, unlike a lot of U.S. companies in various sectors. Both have relatively high payout ratios—the percentage of profits paid out as dividends. Based on 2018 numbers, Exxon Mobil's was at nearly 70% and Chevron's was at 55%. In contrast, the S&P 500's (.SPX) payout ratio was a shade under 40% as of Dec. 31.
These ratios are considered manageable for both companies, provided that oil prices don't tank.
Stewart Glickman, an energy analyst at CFRA Research, says it is easier for both companies "to boost the dividend, given how much excess free cash flow they throw off, than it is to boost production a lot."
Exxon Mobil last April declared a quarterly dividend of 82 cents a share, up 6.5% from 77 cents. Chevron recently announced it would boost its quarterly payout by 6% to $1.19 a share from $1.12.
Alastair Syme, head of energy equity research at Citi Research, says that the global integrated majors that he follows yield an average of about 4.5%. The dividends of these companies, he says, are a lot more "secure than they were two or three years ago," because balance sheets are cleaner and management is less aggressive with capital spending.
"There's not the overhang of debt that there certainly was at the end of ," says Syme, who has a Buy rating on Chevron and is Neutral on Exxon Mobil.
For investors, a crucial question is whether these companies are making the necessary investments to grow their businesses. That isn't so easy to answer.
CFRA's Glickman sees both companies more as income plays: "They are not going to capture the growth investors, so they are trying to capture the income investors given how much free cash flow they generate."
Chevron spent about $14 billion on capital expenditures in 2018, down from roughly $30 billion in 2015, Syme notes. He expects the company's free cash flow to expand from the current level.
Exxon Mobil is in a different position. The company is now boosting its capital spending, most recently to $26 billion last year, but Syme sees the dividend as remaining affordable for the firm.
In 2018, Exxon Mobil's free cash flow after investments was $20 billion, which far exceeded the $14 billion of dividends paid out, and the company still lowered its debt by $4.5 billion to $38 billion.
Another source of dividends in the energy patch is exploration and production companies, which harvest oil and gas and are known as upstream operators.
McDermott of Morgan Stanley notes that investors are rewarding those companies that are generating free cash flow.
"When it comes to the E&Ps, you have more variability" in terms of throwing off free cash flow, says Glickman.
Among E&P companies, the yields vary considerably. Marathon Oil (MRO) is at 1.3%, and ConocoPhillips (COP) is at 1.8%.
ConocoPhillips announced late last year that it expected to return about half of its cash flow from operations in 2019, including $3 billion of share buybacks if WTI is at $50 a barrel or more.
Last October, the company declared a quarterly dividend of 30.5 cents a share, up 7% from 28.5 cents.
Murphy Oil (MUR) and Marathon Oil have held their quarterly disbursements at 25 cents and 5 cents, respectively.
Marathon slashed its dividend in 2015 after oil prices collapsed. The company lost money in 2015, 2016, and 2017, and returned to profitability last year. Glickman maintains the dividend could be raised in 2020 as profitability increases further.
Murphy Oil cut its dividend in 2016 to 25 cents a share from 35 cents, a less drastic move than Marathon made. Glickman says the company made "a more income-investor-friendly decision in 2016 by only trimming and not slashing" its dividend. "But as a result, they are less likely to expand the dividend in the near term."
Meanwhile, the stock yields a very attractive 3.7%.
The other companies Barron's looked at include Valero Energy (VLO), a refiner. The company has been increasing its disbursements regularly. In January it declared a quarterly dividend of 90 cents a share, up from 80 cents, for a 12.5% increase. A year earlier, it had raised its quarterly payout by 14% to 80 cents a share from 70 cents.
It sports a yield of 4.4%, tied with Exxon for the top spot on the list.
|For more news you can use to help guide your financial life, visit our Insights page.|