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 discount to only 4.) above. The stock is trading at a 39.7% premium to its calculated fair value of $47.03. 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 Four-Year Div. greater than 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 13 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 greater than MMA
The NPV MMA Diff. of the $538 is below the $2,200 target I look for in a stock that has increased dividends as long as COP has. The stock's current yield of 4.11% exceeds the 3.22% estimated 20-year average MMA rate.
Memberships and Peers: COP is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: BP plc (BP) with a 5.1% yield, Chevron Corp. (CVX) with a 3.2% yield and Exxon Mobil Corporation (XOM) with a 2.7% 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 $38.67 before COP's NPV MMA Differential increased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 7.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 7.6%. This dividend growth rate is higher than the 2.3% used in this analysis, thus providing no margin of safety. COP has a risk rating of 2.25 which classifies it as a medium-risk stock.
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. As such, 2012 will show a dividend increase for COP although the amount is the same that was paid by the combined company in 2011.
COP has made significant acquisitions over the past few years to increase its reserves and production capacity. The company is nearing completion of a three-year portfolio optimization plan initiated in 2010. It plans to spend $15 billion of capital per year to support a reserve replacement target of over 100%, with a focus in North America. COP's free cash flow payout has shot up to an unacceptable level as a result of lower cash earnings and increased capex. To compensate, its latest dividend increase was low compared to past increases. As a result, COP is now trading well above my calculated fair value of $47.03. For now I will not be adding to my position.
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 was long in COP (4.4% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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