Energy

Are 6 Big Cap Oil and Gas Dividend Yields Becoming Too High?

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Big Oil is synonymous with Big Money. In fact, some of the greatest wealth creations in the world have come from the energy sector, and many of America’s wealthiest individuals and some of the highest average salaries come from that sector. Now that oil has cooled off and some investors have become concerned that it could challenge $40 per barrel again, it’s worth a look to see which of the large oil and gas giants might be the most attractive for those investors with a long-term outlook.

One strategy that investors often employ in times of concern is targeting the larger dominant players in their sectors. They also target the companies that have been able to keep paying strong dividends through the good and bad times. It turns out that many of the large oil and gas stocks in the energy sector now also have well above average dividend yields.

24/7 Wall St. has conducted a fresh review and screen of the top dividends from America’s largest companies. Of the S&P 500, there were more than 25 companies that had dividend yields of 3.5% and higher even, outside of the real estate investment trusts (REITs). Some yields were much higher, and many of those were in the energy sector. To include some of the key players, there was not just a focus on those energy companies in the S&P 500. Still, foreign companies were screened out.

Having a yield above 3.5% is significant. That is officially over 1% higher than the average yield of the S&P (2.37%) and Dow (2.43%), and it was over 100 basis points higher than a blend of long-term Treasury bonds at about 2.4%. And equity investors generally do not only focus on dividends, even in oil and gas. They have the ambition that share prices will grow over time.

Investors love dividends. Some dividends are needed for retirement income. Other investors use their cash to redeploy into other investments too, and the cumulative compounding of that has helped make it broadly understood that dividends should account for up to half of all shareholder returns over time.

24/7 Wall St. used trading data and the consensus analyst price targets (mean as an average) from Thomson Reuters, and additional color has also been provided on each company. Here are the top large cap oil and gas dividends within the energy sector and with Wall Street analysts expecting long-term share price appreciation ahead.

This is where value investors have a decision to make. Have the big dividend yields in oil and gas become too attractive for value investors to pass up, or have those big money yields become too big for their own britches.

Chevron Corp. (NYSE: CVX) may not be the size in market cap of rival Exxon Mobil, but at about $200 billion it is no slouch in the industry either. Chevron now outyields its larger rival with a 4.1% dividend yield.

Chevron has seen its ups and downs with the price of oil, but it has pledged to not disrupt its dividend unless it simply faces no other serious alternatives. Revenues of $110 billion in 2016 were down from $200 billion just two years earlier.

With a share price of $104.60, its average analyst price target is still up at $122.48. Chevron has a 52-week trading range of $97.53 to $119.00, and it remains to be seen if the oil giant will raise its dividend in the quarters ahead. With its most recent dividend hike in October 2016, Chevron said that it had increased its annual dividend payment for 29 consecutive years.

Enterprise Products Partners L.P. (NYSE: EPD) remains the top player in master limited partnerships (MLPs). Its market cap of $57 billion has been more stable than many MLP rivals. While this screens out as having a 6.3% yield, the reality is that MLPs pay distributions, rather than calling them dividends. This gives part of the payout as income that is taxable, but some of the payout comes without taxes as it is classified as a return of capital.

Houston-based Enterprise Products operates over 19,000 miles of natural gas liquids pipelines and 5,400 miles of crude oil pipelines and related operations. It also owns and operates docks, terminals and storage facilities, and it has a large fleet of tractor-trailer tank trucks, engages in crude oil marketing activities, leases underground salt dome natural gas storage facilities, operates propylene fractionation and related operations and more.

Enterprise’s 6.3% yield-equivalent seems impressive enough, but at $26.55 the stock has pulled back from the highs. Its 52-week range is $24.01 to $30.25. Its consensus analyst target price is up at $32.93.

Exxon Mobil Corp. (NYSE: XOM) is the largest of the integrated oil and gas giants, with a market cap of nearly $345 billion. It ranks second in line behind Chevron in the Dow dividends though. Its massive $31 billion acquisition of XTO Energy for natural gas was done at a time that the economics of today’s energy prices just do not look as promising. Exxon’s 2016 revenues of over $218 billion were down from $394 billion in 2014 and were half of the $451 billion in 2012.

While things might still be tough in the oil market, how many companies in history have been able to claim that their CEO took early retirement to become the U.S. Secretary of State?

Exxon Mobil has paid dividends for decades, and it just raised its payout to $0.77 per quarter. Exxon also showed that it has now increased its annual dividend payment to shareholders for 35 consecutive years.

Exxon Mobil shares were recently trading at $81.35, with a 3.8% yield. Its average price target is $87.13 and the oil and gas giant’s 52-week range is $79.26 to $95.55.

Occidental Petroleum Corp. (NYSE: OXY) is not the largest of the oil companies in raw market value, but at $46 billion it is still rather large. Occidental actually has the largest dividend yield of the major U.S.-based oil and gas integrated players. Some of that dividend yield may be artificially high because its shares have fallen hard from the highs. For that matter, a weak oil market might be a continued risk to Occidental. Its 2016 revenue of $10 billion was almost half of the revenues just two years earlier.

At $59.75 a share, Occidental Petroleum has a dividend yield of about 5.1%. Its average analyst price target is all the way up at $71.44, and its 52-week range is $57.20 to $78.48.

Valero Energy Corp. (NYSE: VLO) always has been considered one of the top petroleum refiners and ethanol producers in the country. Its stock can be volatile around the swings in oil pricing and also around how the refining sector’s margins grow and contract.

Due to lower oil prices, Valero’s revenue of more than $75 billion in 2016 was down handily from prior years. Unlike traditional oil companies, refining companies do not thrive as well under high oil prices as the margins are tougher. As of December 31, 2016, the company owned 15 petroleum refineries with a combined throughput capacity of approximately 3.1 million barrels per day. Valero also owned and operated 11 ethanol plants with a combined capacity of approximately 1.4 billion gallons per year. Valero also owns the 2% general partner interest and a majority limited partner interest in Valero Energy Partners.

At $66.85 per share, Valero has a consensus target price of $73.89 and a 52-week range of $46.88 to $71.40. Its market value is very close to $30 billion, and Valero has been steadily raising that dividend payout.

Williams Companies Inc. (NYSE: WMB) is an energy infrastructure company that operates oil and gas pipelines around the United States. Its primary natural gas pipeline system extends from Texas, Louisiana, Mississippi and the offshore Gulf of Mexico through Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Delaware, Pennsylvania and New Jersey to the New York City metropolitan area. Other pipelines cover parts of the central and western states.

Its dividend history has been back on the rise since 2016 and the $0.30 quarterly payout generates a dividend yield of about 4.17%. The Tulsa-based company dates back to 1908, and it has paid a common stock dividend every quarter since 1974.

At $29.00 a share, and with a value of about $24 billion, Williams has a consensus price target of $33.37 and a 52-week range of $19.60 to $32.69.

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