Investors Chronicle dividend of the week - 12/08/2013

Investors Chronicle – Dividend of the week – 12/08/2013

This week we are going to once again narrow our horizons and have a look at a single sector. We are going to examine the oil sector globally. There is a lot of talk of economic recovery and you would expect the oil price to move higher in that scenario. There are some good dividends to be had in the oil sector. Any well balanced portfolio is going to have at least one oil stock and we intend to provide a pointer, at least from an income perspective.

This should also present us with an exercise in capital market efficiency. Many of the companies in this analysis are multinationals performing pretty much the same business operations and you would expect the fundamentals to be reasonably aligned.

The initial criterion is to select the ‘oil and gas producers’ sector globally and this gives us a list of 18 stocks that are covered by DividendMax.

Our next selection criterion is for an annualised yield of over 2%. This eliminates three US and two UK stocks including Tullow oil and BG Group. Technip of France is also eliminated. From this we have the long list which includes Premier Oil, Galp Energia SGPS, Occidendtal Petroleum, ConocoPhillips, Exxon Mobil, Chevron, BP, Repsol, Gas Natural SDG, Enagas, Total and Royal Dutch Shell. We cover 6 variants of Royal Dutch Shell in DividendMax, but we will focus on the UK ‘A’ and ‘B’ shares.

An important point to make when using DividendMax and dealing with a sector like oil is that it is not appropriate to use the 3 dividend analysis as most of these companies pay quarterly dividends and we like to work on an 18 month or longer timescale, so we will use the ‘duration’ function and select the 18 month option. This will bring up the next three dividends for those who pay the conventional Interim / Final and the next six dividends for those who pay quarterly.

At this point we can look at the fundamentals:

We will leave it to the reader to decide if the markets are operating efficiently. We are going to eliminate Galp Energia SGPS on price/earnings, dividend cover and yield considerations as that does look like the wrong fundamentals for the sector. Putting aside Premier Oil for the time being, the yield range is 2.79% - 6.63%, which is quite a significant range. The price earnings range is from 8.0x to 12.6x, roughly a 50% premium from top to bottom. We will eliminate Royal Dutch Shell ‘A’ shares as we do not want to cover the company twice. It was worth putting them in initially to explain to readers that the ‘B’ shares are more tax efficient for UK investors. The ‘A’ shares carry a slight yield advantage which reflects the differing tax treatments.

Interestingly, three of the top four yielders have dividend cover below two and we will eliminate all of them on the grounds of low-ish cover. The lower cover gives less scope for dividend increases and as we like to look forward not back, dividend increases are the most likely way for investors to protect their capital. So, Enagas, Gas Natural and Repsol are all eliminated on grounds of cover and they all have relatively high PE ratios. Occidental Petroleum looks a little pricey and the yield is not great so they too are removed from the list.

Representing the U.K, we have Royal Dutch Shell ‘B’, Premier Oil and B.P. We have Total from the Eurozone and from the US, we have Chevron, Exxon Mobil and ConocoPhillips. I am looking for one UK, one Eurozone and one U.S stock to make up the shortlist and at this point elimination becomes difficult.

What are the brokers saying about the seven survivors? The table below represents the number of brokers in each of the recommendations categories of buy / hold / sell:

It is noticeable that Premier Oil has just paid its maiden dividend of 5p as a final dividend last June. The current average analysts forecast are for a dividend of approx. 3p for the year to December 2013. With the strong cover, we find a reduction in the dividend an unlikely prospect. However, the yield is currently too low to be dividend of the week.

Rightly or wrongly, we will eliminate B.P on the grounds that the fallout from the Deepwater Horizon spill is not yet fully settled. You also cannot get away from the fact that it has cost B.P a very great deal of money. Provisions in the accounts may prove too high or too low. It is this uncertainty that puts me off B.P. So we go with Royal Dutch Shell.

In the U.S, we are going to go with the brokers and also on the grounds of lower valuation and select Chevron. Total goes through, being the only European stock left standing, although to be fair, it is quite well supported by the brokers.

Let’s have a look at the dividends paid by each company over the past 6 years:

Chevron

Royal Dutch Shell ‘B’

*Note that the exchange rate has not yet been set and that this is an estimate based upon the prevailing exchange rate.

Total

Total have not yet reported 2013Q1

As with previous dividends of the week, we are left with a difficult choice and the table below illustrates how close the call is:

It really is going to have to be up to the reader in the end and their attitude towards buying shares outside of this country. Do you want direct Euro or U.S. dollar exposure? In any event, with dividend of the week our aim is to provide the reader with a choice and it will not always be the case that we all agree on the final selection.

Clearly in terms of recent historic dividend growth, the greater dividend cover and forecast dividend growth, Chevron is the clear winner, but are you happy to pay for that with a 25% premium in terms of the P/E and a significant yield discount to Royal Dutch shell? I would say yes in this case and for the first time an international stock makes dividend of the week. Their recent share price history shows a high of 12776c and they currently trade at 12250c, with a 52 week low of 10162c.

Royal Dutch Shell look very cheap at the moment and for the investor, the difficulty has to be in finding the downside, which is not a bad problem to have. Clearly, a plunging oil price would not help matters, but this is unlikely and would affect all of the stocks in this analysis adversely. Their recent share price history shows a high of 2365p and they currently trade at 2181p, with a 52 week low of 2098p. They also have a strong share buyback operation that will result in purchases of around $4billion this year.

Total also look very good value. Their recent share price history shows a high of 4184c and they currently trade at 4025c, with a 52 week low of 3525c. It should be noted that if direct exposure to the Euro is required that there is a Euro version of the Royal Dutch Shell stock available on the Amsterdam Stock Exchange.

For Chevron, we are estimating the next six dividends to be 100c, 100c, 100c, 105c, 105c, and 105c. They are at 12307c at Fridays close. At 12307c, this will generate a return of 3.94% annualised over a 15 month period.

Chevron yield calculation:

100c (A) + 100c + 100c + 105c + 105c +105c = 615.0c between now and 17/11/2014 (approximate ex-dividend date of the sixth dividend)

Ergo 615 / 12307 = 4.997% 4.997% annualised = (4.997x365) / 462* = 3.94%

*Number of days until theoretical ex-dividend of the sixth dividend.