The company’s latest dividend increase was announced in February 2014 when the Board of Directors approved a 12.50% increase in the quarterly dividend to 72 cents /share. The company’s peer group includes Exxon Mobil (XOM), Imperial Oil (IMO) and Hess (HES).
Over the past decade this dividend growth stock has delivered an annualized total return of 18.10% to its shareholders. This was due to the fact that the stock was really cheap a decade ago, coupled with the fact that earnings and dividends per share increased rapidly.
The company has managed to deliver a 13.50% average increase in annual EPS over the past decade. A large portion of the earnings growth occurred in 2004. The rest of the decade has been characterized by fluctuating earnings. Occidental Petroleum is expected to earn $7.15 per share in 2014 and $7.26 per share in 2015. In comparison, the company earned $7.34/share in 2013.
Occidental Petroleum has a record of consistent share repurchases. Between 2006 and 2014, the number of shares declined from 860 million to 801 million.
In early 2014, the company announced a few strategic initiatives, which will be catalysts for investor returns in the next five years or so. First, the company is selling off assets, and using the proceeds to buy back stock.
Second, the company is planning to spinoff its assets in California as a standalone company. Spinoffs have historically done really well for investors on average, because management is able to better focus on the underlying business after separation.
Third, the company is trying to focus on its remaining US assets and squeeze out mid to high single digit production growth. If oil and gas prices do not fall significantly from present levels, this could translate into much higher earnings per share.
Last, but not least, the company has put dividend growth as its second most important priority. The first priority is obviously maintaining production. Next priorities include growth, share repurchases and acquisitions.
The annual dividend payment has increased by 17.30% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade.
A 17% growth in distributions translates into the dividend payment doubling every four years on average. If we check the dividend history, going as far back as 2005, we could see that Occidental Petroleum has actually managed to double dividends every four and a half years on average. Prior to 2002 however, the dividend was unchanged for 12 years in a row at 12.50 cents/quarter, after a very steep dividend cut in early 1991. Between 1981 and 1990, the quarterly dividend was unchanged at 31.25 cents/share. All historical data has been adjusted for stock splits. The company had also suspended dividends in 1972 – 1974. Based on the spotty dividend growth history, I am not so sure whether Occidental Petroleum has ingrained in it a culture of consistent dividend increases. If not, the past decade of consistent increases could be mostly a byproduct of the rising oil and gas prices, rather than a shift in the dividend culture.
Over the past decade, the dividend payout ratio decreased from 93% in 2004 to 27% in 2006. Since then, it has been increasing gradually to 52.50% by 2013. Based on forward earnings however, the dividend payout will decrease to 40%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has been on a steep decline over the past decade, which to me is a warning sign. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is attractively valued, as it trades at a forward P/E of 13.40 and a current yield of 3%. I hesitate on initiating a position in Occidental Petroleum, because I already have ownership in ConocoPhillips, Exxon Mobil, Chevron, British Petroleum and Royal Dutch Shell. That being said, the company could be a good investment for those who like to follow spin-offs, and possibly other investing strategies.
Full Disclosure: Long XOM, COP, CVX, BP, RDS/B
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