ConocoPhillips (COP) Dividend Stock Analysis

ConocoPhillips (COP) is an oil company with a worldwide presence.  COP’s major activities focus on the upstream components of oil and gas production – namely exploration and production.  To be a bit more specific, COP explores for, produces, transports, and markets, crude oil, bitumen (a highly viscous or semi solid form of petroleum) and natural gas.  COP is a global company with 45% if its oil production coming from the US, 20% from Europe, 15% from Asia and the Middle East, 12% from Canada, and 5% from Africa.  For natural gas production 36% comes from the US, 14% from Europe, 21% from Canada, 26% from Asia and the Middle East, and 3% from Africa.  In 2012, COP spun off Phillips 66 (PSX) which is focused on midstream production (refinement and storage).

 

COP Basic Company Stats

• Ticker Symbol: COP
• PE Ratio: 10.0
• Yield: 4.47%
• Beta: 1.1
• Market cap: $72.1 B
• Website: www.conocophillips.com

 

COP vs the S&P500 over 10 years

COP has been beating the S&P500 over the last 10 years, returning about 133% compared to only 88% for the S&P500.  This is actually a bit more impressive than you would first think once you consider that in 2012 COP spun off Phillips 66 (PSX).  If you add in the returns from PSX as well, then the price appreciation will be closer to the 200% mark.

 

COP Earnings Per Share (EPS) & Dividend Growth

• 3 year EPS growth: -11.9%
• 10 year EPS growth: 5.9%
• 3 year dividend growth: 10.8%
• 5 year dividend growth: 8.9%
• 10 year dividend growth: 13.9%

 

At first glance COP’s EPS appears sporadic.  However, the situation is not as bad as it appears.  First, the rather massive dip in 2008 deserves explanation.  This is related to impairment charges of $34.5 billion (that’s billion with a B).  Impairment charges are related to the writing down of worthless goodwill.  In 2012 the dip in EPS is related to the spinoff of Phillips 66 (PSX).

Despite the fluctuations in EPS, dividend growth has been steady and predictable.  The 10 year dividend growth rate is 13.9%, the 5 year growth rate is 8.9%, the 3 year growth rate is 10.8%, and the 1 year growth rate is 0%. Don’t let the lack of dividend growth over the last year.  COP held it’s dividend constant and then spun off PSX, another dividend paying company.  So if held COP in 2012 and benefited from the spin off, you were actually getting more dividends in 2012 than in 2011.  You were just getting them from two companies rather than one.

With a starting yield of 4.4% and a growth rate of about 10%, COP’s yield on cost will grow to about 10.4% in 10 years.  In order to double the dividend, using the rule of 72, it will take approximately 7.2 years.

 

COP Payout Ratio

COP’s payout ratio has been relatively low over the last decade.  The negative payout ratio in 2008 is due to the negative EPS that resulted from writing off impairment charges.  The higher payout ratio in 2012 is due to a dip in earnings resulting from the PSX spin off.  COP’s current payout ratio is below 50%, which leaves plenty of room for future dividend growth.

 

COP Cash Flow Per Share and Revenue

Due to the spinoff of PSX, the 2012 revenue numbers are at a historical low.  Unfortunately, this makes the revenue growth calculations negative, which doesn’t really paint an appropriate picture of the company, but revenue growth has been generally positive over time.  Cash flow has been positive every year other than 2008.

 

COP Balance Sheet

The current debt to equity ratio of COP is 49%, which is about on par with other equities (~40%). Over the last 10 years the debt to equity ratio has fluctuated between 20% and 59%.  At present, I don’t see the debt burden as a problem.

 

COP Risks

The biggest risks related to COP come from the fact that oil and gas often come from unstable regions of the world.  You might remember the civil war in Libya last year or so that shut down oil production.  COP has the majority of its long-term assets in OEDC (organization of economically developed countries) countries, which should work to lower its international risk.  Oil and gas remain finite resources, so if COP cannot replenish its reserves by finding new ones, eventually it will run out of oil and gas – but this is a very long term risk and not one that I would be particularly concerned with at this time.

 

COP Valuation Panel

Graham Number

The Graham number represents one very simple way to value a stock.  The Graham number for COP is $77.11.  The current stock price is well above that, suggesting that COP may be undervalued at the moment.

Two Stage Dividend Discount Model

Using a risk free rate of 2%, an expected return of 10% and the beta of 1.1, the CAPM model provides a discount rate of 18.8%.  Using an initial growth rate of 10% for 5 years and a slower growth rate of 7%, the two stage model produced a value of $29.47  I also tried this model with a discount rate of 9.9% and got $113.73.

Gordon Growth Dividend Discount Model

Using the 18.8% discount rate, this model returns a value of $29.04.  Using a more conservative 10% discount rate we  get a value of $261.36.

Valuation Conclusion

With the dividend discount models the choice of discount rate greatly affects the output of the model.  Out of the five values generated, the median value is the $77.11 produced by the Graham number.  I would use this value and consider COP undervalued.

 

COP Cash Secured Puts

COP has been on a tear since it’s spin off of PSX.  The stock isn’t anywhere near its low at the moment, so I would be hesitant to sell a put against it.

 

Conclusions

Overall, I like COP and feel that it is appropriately valued and possibly even undervalued. I feel that this stock has many more years of dividend growth and capital appreciation in it.  If energy stocks continue their strong historical gains then COP will continue to deliver.  I would consider buying up some additional shares of COP.

Disclosure: I am currently long COP and PSX.

Readers:  What are your opinions about ConocoPhillips?