On Thursday, February 4, oil major ConocoPhillips (NYSE:COP) slashed its quarterly dividend by 66%, from 74¢ per share to 25¢ per share. This is the first dividend reduction by COP in about 25 years. With this cut, COP will be removed from the CCC list and, specifically, from the list of Dividend Contenders (10-24 consecutive years of dividend increases).
Global crude oil prices have plummeted from the 2014 high price of over $100 a barrel, making it hard for energy companies to maintain profitability. For COP, which split from refiner Phillips 66 (NYSE:PSX) in 2012, the challenge is even greater. As an independent upstream company, COP is primarily engaged in the discovery, exploration and production business. It relies heavily on the crude oil price to generate cash flow and earnings.
As before with Seadrill Limited (NYSE:SDRL), the company did not indicate that the dividend was in danger. In fact, while discussing second quarter results in August last year, CEO Ryan Lance assured investors that the dividend was safe:
"The dividend is safe. Let me repeat that. The dividend is safe."Even during the announcement of third quarter results in October, the CEO was quoted saying:
"We remain committed to a compelling dividend, affordable growth and strong financial performance."Well, I don't think a quarterly dividend of 25¢ and a yield of 3% is compelling, especially in this business. It seems to me that COP is going into survival mode as it tries to avoid further deterioration of its financial condition. Said the CEO during the announcement of fourth quarter and and full year 2015 results:
"The decision to reduce the dividend was a difficult one. The dividend has been, and will continue to be, a top priority. We still intend to provide a competitive dividend..."Perhaps COP again will provide a competitive dividend some day, but I'm not sticking around to find out. Restating earlier resolutions provides little consolation, as I'm taking a big loss on this investment. Nevertheless, here goes:
If a company cuts my dividend, I will cut its shares from my portfolio!
Don't speculate. Don't chase yield. Don't downplay risk. Don't trust the Board.Below is a chart that illustrates my trades in COP. Initially, the investment looked pretty sound, but the drop in the crude oil price has taken its toll:
Trading Summary
I bought 38 shares of COP in May 2013 at $64.66 per share at an initial YoC (yield on cost) of 4.08%. In October 2015, I added 47 shares at $53.93 and an initial YoC of 5.49%.
2013-05-21
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Bought 38 shares of COP at $64.66 per share:
|
$
|
2,460.08
|
2013-06-03
|
Cash Dividend Receipt:
|
$
|
25.08
|
2013-09-03
|
Cash Dividend Receipt:
|
$
|
26.22
|
2013-12-02
|
Cash Dividend Receipt:
|
$
|
26.22
|
2014-03-03
|
Cash Dividend Receipt:
|
$
|
26.22
|
2014-06-02
|
Cash Dividend Receipt:
|
$
|
26.22
|
2014-09-01
|
Cash Dividend Receipt:
|
$
|
27.74
|
2014-12-01
|
Cash Dividend Receipt:
|
$
|
27.74
|
2015-03-02
|
Cash Dividend Receipt:
|
$
|
27.74
|
2015-06-01
|
Cash Dividend Receipt:
|
$
|
27.74
|
2015-09-01
|
Cash Dividend Receipt:
|
$
|
28.12
|
2015-10-30
|
Bought 47 shares of COP at $53.93 per share:
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$
|
2,534.74
|
2015-12-01
|
Cash Dividend Receipt:
|
$
|
28.12
|
2016-02-05
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Sold 85 shares of COP at $32.55 per share:
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$
|
2,766.71
|
Capital loss:
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$
|
2,228.11
| |
Dividends received:
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$
|
297.16
| |
Commissions/fees:
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$
|
3.00
| |
Net loss:
|
$
|
1,930.95
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The net loss is 38.7% on the original amount invested, or 26.3% annualized.
Before the dividend cut, 85 shares of COP yielded $252.60 of annual dividend income, which is the amount that I'm subtracting from DivGro's projected annual dividend income.
Do you own shares of COP? Are you planning to sell your shares after the dividend cut? If a stock you own cuts its dividend, do you always sell the stock?
It was a stinger for sure FerdiS. I own 106 shares so I took about a $200 per year hit on income. I am keeping the stock because I am down about $3,000 on the investment. To me that is just a paper loss at this point, but if I sell I now have a real loss added to the $200 per year income loss.
ReplyDeleteI bought all my oil stocks (BP, RDS.B, COP) knowing this could happen so my mindset is a bit different than a "normal" DG stock. I am prepared mentally for the cuts or freezes in oil. I will hold all these company's until things bounce back and that may be many years.
Yes, Mike A -- that really hurts! Of course, taking the capital loss hurts even more. However, I wanted to close out my COP holding because I already own shares in XOM and CVX, which, at least, have downstream segments to help out somewhat in these difficult times. Hopefully the oil price will recover somewhat so that we don't see further dividend cuts from the oil majors. That would be very disappointing!
DeleteThanks for commenting and sharing your decision!
Hi Ferdi,
ReplyDeleteI own 100 shares of COP at a higher cost basis than you had. I plan on holding at least through 2016 to see if oil recovers to a point where I can get more of my investment back. I agree with your take on COP though it's revenue and recovery will take longer because of it's place in the oil production process.
I respect your decision to hold on, but I feel I wanted to move on. COP does not have the downstream segments to compensate for losses due to low crude oil prices, so, as you say, they'll take longer to recover. I wish you the best of luck with COP, and hopefully the stock surprises both of use with a quick recovery!
DeleteI understand the premise of cutting a stock from a portfolio when it cuts its dividend, but I am not much convinced that it is a good strategy. I think such strategy works well if you are able to see the cut coming either from the company's books or events which could put the company into a trouble such as oil price drops in this case. Selling a stock after the company cuts the dividend is in my opinion too late. You invested around $5k and you were receiving about $27 in dividends per quarter. Now when the company cut the dividend you are realizing a loss almost 50% and if you invest the remaining cash elsewhere you still will not be able to recover the loss and the cut of the dividend unless you invest into a company which will pay you double of what COP paid so you keep getting that $27 per quarter on your $2,500 or so new investment. To me it is like a dog chasing his tail. I think it is too late to take action as such action is just losses. I own COP, I missed the analysis or red flags warning about potential dividend cuts, and I am not willing to take 50% loss on a stock which will recover once the oil recover (and it will one day). With dividend investing you have to look at the investment horizon. Are you investing in the next 5 years or next 25 years? Such move might be reasonable if you are a retiree (although I wouldn't be probably selling either) but if you are investing for the next 25 years I think this is actually an opportunity although it is scary investing into companies which are stressed now, so I am holding reinvesting my dividends but I will not be adding new money into this stock unless it shows a life again. Now, to me, it is a growth stock. I may sell when the price recovers at some point in the future, but I think when that happens the stock will no longer be a sell.
ReplyDeleteHi Martin -- thanks for your comprehensive comment and sharing your perspective. I really appreciate it. Of course I sold my shares too late -- if only I saw this coming earlier I would have done so before the cut. I guess part of my journey is learning, and hopefully I won't make the same mistake too many times!
DeleteI respect your decision to hang onto your shares. I'm hoping it works out for you. My investment horizon is more likely 10-12 years or so, not 25 years. (I wish I were much younger so I could look forward to 25 years of dividend growth investment!)
Personally, I would not consider COP to be a growth stock unless the crude oil price makes a significant move back to where it came from! I think there are other dividend growth stocks with far better prospects at this point in time...
Thanks again for your perspective -- and take care!
The COP cut sure did hurt especially on the heels of other big O&G related cuts, specifically KMI which was found in many portfolios. Luckily I closed my position in COP in December 2015 because I expected the dividend was going to be cut. I thought they could make it through Q1 without cutting but either Q2 or Q3 would bring a cut unless oil drastically changed direction. The position was also quite small and I'd been contemplating closing it for over a year by that point. So the timing just worked out.
ReplyDeleteI don't have a hard and fast rule for selling after a dividend cut because I think it needs to be a variable idea. For commodity companies like COP I have a bit more leniency in regards to a dividend cut especially when the underlying commodities sell off like oil has. But if a company like JNJ or KO cut then they'd be gone pretty quick because something really bad is up and it's not an issue of commodity price swings.
I really appreciate your perspective, PIP. I must admit that I did not see the problems with COP coming, otherwise I would have sold my shares earlier. I do think COP's problems will continue, especially if the crude oil price does not recover quite soon. That's why I decided to take the capital loss and to get out now.
DeleteMy portfolio has taken some big hits lately, as I sold out of positions I feel don't belong in DivGro. Hopefully, the overall portfolio risk will be lower as a result of these sales. Of course, they hurt but I'd rather take the hit now and position myself better for the future.
Take care!
Good decision DivGro.
ReplyDeleteIt is tough to sell a position if you lose about 4 months worth of dividends. I lost a year worth of dividends by selling KMI a couple of months ago.
Still I think we've made the right decision!
Waiting will cost even more.
Best wishes,
DfS
You're right -- I really hate the capital loss. In the case of COP, though, I feel the company are in dire straits because they can't rely on downstream segments as the other oil majors do. If crude oil stays depressed for more than a year or so, COP will we in bigger trouble than now.
DeleteThanks for commenting!
Yep, I own a tiny bit of COP. Not selling it, because I'm at a cost basis of $51 and can see the price hitting that level again within 12 months. Sure, the dividend sucks now, but once the price rebounds, my guess is that the dividend will return.
ReplyDeleteFor your sake, I hope you're right Mike H. Also for my sake, since I own plenty of shares of CVX and XOM, which I'm planning to hang onto for the long run. Take care and thanks for visiting!
Delete