Four Cheap Oil Industry Dividend Payers
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I was working with some stock screens recently in a search for “cheap” dividend payers. I like to keep my searches simple, so I only included three criteria: a reasonable market cap, a share price “close” to book value, and a dividend yield at or above 4%.
Although keeping my screens so simple often requires more legwork on my part to sort out the stocks I'm interested in from those that I don't want to examine further, I find that being too stringent with screening criteria often creates a list that is too small and filled with anomalies. The screen I ran turned up over 50 stocks, which I went through one by one. I found that four of the stocks that caught my eye were from one sector, which is often a sign of an investment opportunity.
The four companies were all foreign energy giants: BP (NYSE: BP), ENI (NYSE: E), Royal Dutch Shell (NYSE: RDS-B), and Total (NYSE: TOT). Although all operate out of struggling Europe, they each have a global reach. In addition, like every major oil company, this quartet is working on replacing oil reserves, an increasingly difficult and costly effort. So depressed share prices are understandable. However, oil and natural gas will remain important energy sources for decades to come, so there is still a great deal of opportunity for these giants over the long-term.
BP was involved in the massive spill in the Gulf of Mexico that quite literally had industry-wide repercussions, but most of the haze surrounding that event has passed. There are still lawsuits to face, at likely massive costs (the company recently settled one for some $4.5 billion), but at least the final repercussions of the spill are starting to be known. Indeed, the company's future now appears much brighter than it did in the days and weeks after the spill
BP, however, will not be the same company it was prior to the incident. It will still be a massive industry participant, just less massive than it once was. Another important change for the company is its recent foray into Russia. That country isn't known for being business friendly with outsiders, so this is a deal worth monitoring.
With a yield nearing 5%, this beaten down oil major might be worth taking on despite the added risks it faces.
Total also has a great deal of exposure to financially struggling countries, but it is financially strong and should be able to weather any problems that come from Europe's woes. The diamond in the rough here is the company's strong position in the chemicals industry. Moreover, the company has been investing heavily in an effort to find new reserves and has a notable position in the liquified natural gas space.
It doesn't have the baggage of BP, but it does have some interesting business dealing with countries that have suspect histories when it comes to dealing with outsiders. Like BP, Russia is one such country, but Total also has dealing within Africa and the Middle East. So, a discounted share price makes some sense. Longer term, however, there appears to be plenty of opportunity for this oil major.
With a yield hovering around 5%, Total might interest income minding investors. That said, heavy spending on growth projects could limit dividend growth over the near term.
Royal Dutch Shell
Royal Dutch Shell, meanwhile, is a good company without as much baggage as BP and Total, but it is still located in a financially weak region. Also hampering the stock is Shell's aggressive move into natural gas. Although this energy source appears to have great potential, low gas prices in the United States are a massive obstacle.
Despite the low U.S. natural gas prices, it is important to note Shell's size and experience in the liquified natural gas space. Indeed, it not only has years of experience, but also holds important intellectual property in this increasingly important industry space. So, while right now natural gas may be a drag, it could turn into a key asset in the future.
Its yield of about 5% isn't quite double that of industry heavyweight and Dow-30 component ExxonMobil (NYSE: XOM), despite their overall similarities, including the move toward natural gas. This may be a case of investors throwing the baby out with the bathwater. Less aggressive types might find Shell more appealing than BP or Total.
Perhaps the most distinguishing feature of ENI is its solid relationships with countries that are typically considered difficult to deal with. This is particularly true with regard to Africa and the Middle East. Hailing from Italy gives it a proximity benefit that BP, Shell, and Total don't enjoy, but this is only part of the equation, since management has gone to great lengths to ensure its access to reserves in these countries. In fact, the company is one of the biggest players in Africa. While this is a benefit in some respects, it is also a risk.
There are, however, legitimate management concerns here. For starters, the Italian government has a large stake in the company, potentially biasing management away from shareholder friendly activities. Additionally, the company has lagging operations outside of its core that appear to be dragging down overall results. While the two issues may not be connected, it is hard to suggest that they aren't.
ENI's yield of around 4.5% probably doesn't fully reflect the risks ENI shareholder's have to consider. Investors would probably be better served considering one of the other oil companies.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!