Company Description: ConocoPhillips Co. is of the largest independent oil and gas exploration and production (E&P) companies in the world, COP spun off its downstream assets in May 2012.
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. When also considering the NPV MMA Differential, the stock is trading at a 279.8% premium to its calculated fair value of $11.46. 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 one Star in this section for 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 0 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
The NPV MMA Diff. of the $687 is below the $3,500 target I look for in a stock that has increased dividends as long as COP has. The stock's current yield of 4.55% exceeds the 2.19% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: BP plc (BP) with a 7.2% yield, Chevron Corp. (CVX) with a 4.2% yield and Exxon Mobil Corporation (XOM) with a 3.3% yield.
Conclusion: COP did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks COP as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $5.77 before COP's NPV MMA Differential increased to the $3,500 minimum that I look for in a stock with 0 years of consecutive dividend increases. At that price the stock would yield 34.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $3,500 NPV MMA Differential, the calculated rate is 7.5%. This dividend growth rate is higher than the -17.9% used in this analysis, thus providing a margin of safety. COP has a risk rating of 2.00 which classifies it as a Low risk stock.
COP operates in a volatile, cyclical and capital-intensive segment of the energy industry. In May 2012, COP completed the spin off of its downstream assets into a separate company, Phillips 66 (PSX). I have restated COP's dividend history to eliminate the portion of dividend that is now associated with PSX.
With significant North America production, the dramatic decline in crude oil prices has put pressure on the company's operating results. The company's free cash flow payout of -94% (previously -110%) is at an unacceptable level. This is a result of lower cash earnings and increased Capx. To compensate, COP cut its dividend in February 2016. COP is now trading above my calculated fair value of $11.46. Barring a dramatic turnaround, COP will likely be removed from the list of stocks I follow at the end of the year.
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 COP (0.0% of my Dividend Growth Portfolio) and long XOM and CVX. See a list of all my Dividend Growth Portfolio holdings here.
Tags: COP, BP, CVX, XOM,