Monday, May 13, 2013

Occidental Petroleum Corporation (OXY) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Occidental Petroleum Corporation (OXY). Below are some highlights from the above linked analysis:

Company Description: Occidental Petroleum Corporation is one of the largest oil and gas companies in the U.S., OXY has global exploration and production operations. Its subsidiary, OxyChem, is one of the largest U.S. merchant marketers of chlorine and caustic soda.

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

OXY is trading at a discount to only 1.) above. The stock is trading at a 15.5% discount to its calculated fair value of $102.57. OXY earned a Star in this section since it is trading at a fair value.

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%

OXY earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. OXY earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1975 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) or Treasury bond? 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

OXY earned a Star in this section for its NPV MMA Diff. of the $19,282. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as OXY has. The stock's current yield of 2.95% exceeds the 2.71% estimated 20-year average MMA rate.

Memberships and Peers: OXY is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: E. I. du Pont de Nemours and Company (DD) with a 3.5% yield, Exxon Mobil Corporation (XOM) with a 2.6% yield and Royal Dutch Shell plc (RDS.A) with a 4.7% yield.

Conclusion: OXY earned one Star in the Fair Value section, earned two 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 OXY as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $190.09 before OXY'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 1.4%.

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 10.5%. This dividend growth rate is significantly lower than the 17.5% used in this analysis, thus providing a margin of safety. OXY has a risk rating of 2.00 which classifies it as a Medium risk stock.

OXY possesses a large and geographically diverse reserve base. The company built its business around finding and acquiring proven properties to drive its future production growth. It should benefit from higher production and oil prices, with domestic growth being driven by reserve prospects in California and the Permian Basin. International growth could come from Bahrain, Oman, Libya and Iraq.

The company is enjoying cost savings from drilling efficiencies. It debt to total capital is at an enviable 16% and the stock is trading at a discount to its $102.57 calculated fair value. However, OXY's cash flow payout of 190% prevents me from seriously considering the stock at this time.

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 held no position in OXY (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: [OXY] [DD] [XOM] [RDS.A]