This article originally appeared on The DIV-Net April 11, 2011.
Linked here is a detailed quantitative analysis of ConocoPhillips (COP). Below are some highlights from the above linked analysis:
Company Description: ConocoPhillips Co. was formed in 2002 when Phillips Petroleum and Conoco merged and is now is the fourth largest integrated oil company in the world
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
COP is trading at a premium to all four valuations above. The stock is trading at a 12.0% premium to its calculated fair value of $72.12. COP did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
COP earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. COP earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
COP earned a Star in this section for its NPV MMA Diff. of the $8,898. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as COP has. If COP grows its dividend at 15.0% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. COP earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.
Memberships and Peers: COP is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes: BP plc (BP) with a 3.6% yield, Chevron Corp. (CVX) with a 2.7% yield and Exxon Mobil Corporation (XOM) with a 2.1% yield.
Conclusion: COP did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks COP as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $129.79 before COP's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 2.03%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing no margin of safety. COP has a risk rating of 1.75 which classifies it as a Medium risk stock.
COP made significant acquisitions over the past few years to increase its reserves and production capacity. The company is reevaluating its holdings with a focus on growth and upstream assets. It is selling under-performing assets to raise returns and reduce debt. In 2010, COP sold its Lukoil shares for $8.3 billion and recognized $7.1 billion from other asset sales. The stock recently added to the Dividend Achievers list after raising its dividend for 10 consecutive years. Though COP is trading above my calculated fair value (currently $72.12), I will continue look for opportunities to add to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in COP (1.7% of my Income Portfolio) and CVX. See a list of all my income holdings here.
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Tags: [COP] [BP] [CVX] [XOM]
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