Recent sell: BP.
I really hope that I don’t need to write too many articles like this. When I buy a stock, I want to hold that stock indefinitely. My hope is that as I only invest in high quality dividend growth stocks that these stocks will continue to perform and pay me an income for life. For me to have to sell one of these companies means that something somewhere went wrong.
In my portfolio I want predictability, not in terms of share price (frankly my shares could drop 50% for all I care), but in terms of the income that I gain from these shares. I need confidence that a company can meet its dividend obligations without fail. Unfortunately, I no longer feel that BP can continue to do so in the current environment.
EPS for 2015 came in at -0.35 a share whilst reported dividends per share were 0.40. This means that the company has had to take on debt and sell assets to fund its dividend. Judging by the continued weakness in oil price and Q2 results we can expect that BP will once again have to load up on debt to meet its dividend obligations this year. Although there are predictions that oil price will recover and whispers of any output freeze – the simple answer is that we don’t know if these events will happen.
I’m not happy to sit in hope.
Is it really prudent for investors to sit and hope something is going to happen or should they act on the information they currently have to hand?
I don’t like betting on what may happen and hoping that predictions materialise. The truth is, we don’t know when oil prices will rise and I’m not comfortable in holding a stock that I feel is in a position of squeeze between pleasing shareholders (via dividend) and doing what’s best for the balance sheet and the company in the long-term. ConcoPhillips is a lesson to investors who think that oil majors can continue to take on debt with the company recently slashing its dividend from 74c per share to 25 per share. In my mind (from what I understand from the decision), ConcoPhillips made the correct decision to protect their balance sheet from further damage and to brace themselves for lower prices for long.
When I begin to look at BP’s fundamentals, its debt and continued asset sales I begin to feel like the prudent thing for the company to do would be to cut its dividend.
XOM Better placed.
I’m sure that BP will be just fine over the long-term once oil prices recover but their dividend remains in question. Remember – dividend growth investors seek to grow their income from dividends over time and shouldn’t look for capital gains as a factor for investing.
I’m not selling out of oil altogether, I’m simply reducing my holdings in this volatile environment and placing my bets on a company that I feel is in much healthier shape. I won’t go into detail, but it’s clear to me that XOM is much better placed to ride out a situation where oil prices remain low for years to come. It’s balance sheet is superior sporting a much lower debt to equity ratio (by circa 60%), and its EPS are still in positive territory. It’s also worth considering that XOM has a AA+ credit rating from S&P as opposed to the A-2 BP holds. This means that any debt XOM does take on will likely have smaller interest repayments. These ratings are also indicators to the overall financial strengths of the companies.
I also feel much more confidence in XOM’s managements committment to its dividend with its 33 year dividend growth streak a testament.
BP isn’t going to disappear tomorrow, don’t worry. If you’re a share holder and are happy with the risks then by all means hold, who knows, it may pay of handsomely for you if oil prices tick up in the near future. Enjoy the yield! But, for me, the risk just isn’t worth the reward. When a stock’s current fundamentals are pointing towards danger and my holding in that stock is showing a 10% gain, I’m happy to lock in the capital gain (tax-free) and buy a stock that I feel has more solid fundementals.