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Tuesday, May 21, 2013

Recent Buy: COP

May 21, 2013: Bought 38 shares of COP at $64.74 per share.

ConocoPhillips (COP) is an American multinational energy corporation with headquarters in Houston. Created in 2002 through a merger of Conoco Inc and Phillips Petrolium Company, COP became the 5th largest integrated oil company in the world. In 2012, COP spun off its downstream assets to Phillips 66 (PSX), with the intent of maximizing shareholder value.

Last month I completed a stock analysis of COP when it was trading below $58 a share. I hesitated to buy COP at that time because it was not discounted by at least 5% to my fair value estimate. A reader of my post pointed out that COP has not increased its dividend in the two years he's owned it (although the spin-off to PSX could be considered a type of dividend payment). So, the question is, why would I buy COP today when it is trading at a premium to my fair value estimate and without evidence that it would be increasing its dividend?

One obvious answer is that COP will be trading ex-dividend tomorrow and despite not having raised its dividend in a while, COP still pays a healthy 4%! Also, according to gurufocus' fair value calculator, COP could have a fair value of $91.46, for a 30% margin of safety at today's price per share. 

Fundamentally, though, I believe I've made a mistake in being so pedantic about my selection criteria. Very few stocks will pass all my selection criteria. And there may be good reasons why one or more of the selection criteria (presently) cannot be met. I should investigate and understand those reasons and not summarily dismiss opportunities to buy great dividend growth stocks because I blindly apply some rules!

Analysis Update

At my purchase price of $64.74, COP's annual dividend of $2.64 yields 4.08%. Before COP spun off its downstream assets to PSX, it had a track record of 12 consecutive years of dividend increases.

Over the past 10 years, COP has outperformed the markets handily, returning 343% compared to 81% for the S&P 500. COP also has an impressive 10-year dividend growth rate of 15.1%. 

Fair value estimates for COP vary from $59.00 (MorningStar) to $60.30 (S&P Capital IQ) to $73.04 (Graham Number method). My purchase price of $64.74 represents a premium of 7% to the median of these estimates ($60.30). According to my stock selection criteria, COP would need to trade below $57.43 for a 5% discount.

The following table provides some key statistics for COP:
The sum of COP's dividend yield and its 5-yr dividend growth rate is 17.16%, well above the 12% required by the Chowder Dividend Rule. COP's 5-yr total payback percentage is 22.5%, also well above the 16% as required by my selection criteria
COP passes the following of my selection criteria:
  • Dividend Payout ratio is 45.05% (below 65%)
  • Debt to Equity ratio is 44% (below 50%)
  • 7-year weighted average dividend growth rate is 14.42% (at least 7%)
  • Forward P/E ratio is 10.69 and the trailing twelve month (TTM) P/E ratio is 11.05 (below 16%)
COP passes 9 out of 10 of my selection criteria, failing only the fair value discount criterium. Consequently, COP earns 6 stars: (*******)

Other ratings for COP

(see Recent Buy: CVX for details on these ratings)
MorningStar Rating (*****)
The Motley Fool's CAPS Rating(*****)
S&P Capital IQ's Stock Report(*****)Buy 
Thomson Reuters StockReport+ (9/10)Positive 

Final Remarks

38 shares of COP represents $100.32 of expected annual dividend income. For the 2013 calendar year, this purchase adds $75.24 of expected dividend income, for a total of $951.65 for 2013.

I now own shares in 9 different companies in DivGro.

Full Disclosure: Long COP


  1. Nice buy and thanks for the analysis. I also just picked up more COP yesterday before the ex-dividend date.

    Take care!

    1. Thanks for visiting... I checked out your blog. Very nice portfolio and some challenging goals you've set yourself!


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