Saturday, October 19, 2013

Recent Buy: SNP

Oct 18, 2013: Bought 31 shares of SNP at $80.61 per share.

China Petroleum & Chemical Corp. (SNP), also known as Sinopec Corp, is headquartered in Beijing, China. It is China's largest manufacturer and supplier of petroleum and major petrochemical products.

SNP is a Dividend Challenger with a modest 5-year streak of dividend increases. It pays semi-annual dividends, usually in June and September. As is the case with several semi-annual dividend payers, SNP has a pattern of paying one larger dividend and one smaller dividend every year. The pattern of payments since 2010 looks like this:
( $1.099  $0.802 )   ( $1.367  $1.066 )   ( $2.193  $1.075 )   ( $2.222  $1.293 )
Dividend payments of $3.515 at a buy price of $80.61 represents a starting Yield on Cost of 4.36%.

With growth of 241% over the last 10 years, SNP easily outpaced the S&P 500's growth of 69%:

SNP's earnings per share has moved mostly upwards, with the exception of a noticeable dip in 2008. Dividend growth shows a similar pattern, except that the dip occurred in 2009:

Analysis of SNP

Fair value estimates for SNP range from $91.00 (MorningStar) to $129.98 (Graham Number), with a median of $91.43. Compared with the median, SNP is discounted by about 19.31%.

The following table provides some key statistics for SNP:
The sum of SNP's dividend yield and its 5-yr dividend growth rate is 22.79%, significantly above the 12% required by the Chowder Dividend Rule. Additionally, SNP passes the following of my selection criteria:
  • 7-year weighted average dividend growth rate is 21.88% (at least 7%)
  • Forward P/E ratio is 6.93 and the trailing twelve month (TTM) P/E ratio is 8.47 (below 16)
  • Dividend payout ratio is 41.66% (below 65%)
  • Estimated 5-year total payback percentage is 26.88% (at least 16%)
SNP's Debt to Equity ratio is 57%, somewhat higher than my 50% target.

SNP appears in my October dashboard as a 6-star stock: (*******)

Other ratings for SNP

 Zacks Rating  2 Buy
 MorningStar Rating  (*****)
 The Motley Fool's CAPS Rating  (*****)

Concluding Remarks

SNP is attractive because it offers a solid dividend yield and a stellar dividend growth rate.

As one of the two integrated oil companies in China, SNP is well-positioned to capitalize on the increased demand for energy in China. Also, SNP's downstream operations, including refineries, are benefitting from strong growth in China's middle class and an increase in automobile ownership. SNP's natural gas business should grow significantly in the coming years. The company is concentrating on building-up production capacity, improving operational organization and growing natural gas output.

One concern is SNP's maturing domestic oil fields and the associated rising costs when production declines become pricier to counterbalance. Attempts to expand operations offshore and to international markets have been too slow to claim meaningful progress. Compared with the average western integrated oil company, SNP is significantly downstream weighted. It does not have an asset structure that balances risk and return in the same way as its western counterparts. Also, to control inflation, the Chinese government plays a major role in the pricing of refined products, which limits SNP's profitability.

Because SNP usually pays dividends in June and September, I'll have to wait a long time for SNP's first dividend payment. Nevertheless, I feel the discounted price and growth prospects warrant my investment at this time.

31 shares of SNP represent $108.70 of expected annual dividend income, which increases DivGro's projected annual dividend income to $1,966.76.

SNP is the 17th dividend stock purchase for DivGro.

Full Disclosure: Long SNP


  1. First off love the blog!! I want to play devils advocate and just ask you what make's you trust SNP & CHL? Institutions owned are only 1% to 2%. I know there is corruption here in America but in China there is a lot more than here in America from what I hear.... Also do you intend to build these up by purchasing more shares or keep them a relatively low weight against' your portfolio?

    Would love to hear your thoughts-


    1. Hi Phil -- thanks for your comment!

      Fair question about SNP & CHL. When I analyze stocks for possible purchase, I can only go by readily available data, opinions and news articles. These are large cap stocks with at least 5-year streaks of dividend increases, strong dividend growth rates, and solid yields. As long as these statements stay generally in tact for SNP & CHL, I'll keep my shares. Of course, if I should find evidence about questionable activity, I would certainly take that into account. If you know something specific of concern about SNP & CHL, I would love to hear about it!

      I'm still building my portfolio and need to work harder on diversification. I'm at 18 stocks now, thinking that 40 is a good number to target. On average, that would mean exposure of 2.5% per stock. I'm not there yet, so I'll continue to look for new acquisitions for a while yet before adding shares to any of my existing holdings. Generally, though, I see investing equally in all my holdings and not differentiating based on some confidence or trust measure. (Right now, though, I've doubled up on ETP and VNR, because I want to avoid dealing with different lots in K-1 stocks).

      Keep in touch!

    2. Yea, No- I don't know of anything negative against these companies but I see diversifying if a key. As long as you have equal weights I'd keep it like you have said above. Trust me these are going to be snow balling sooner than later and with your current pace you are going to be there in no time. The reason I ask is because now you have me interested in these stocks, will be looking into them quite thoroughly. As you said past experience is very solid- Keep up the Good Work!!!

    3. Thanks! Good to know there's nothing specific... let us know if you find something while looking into these stocks. Good luck!


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