Homepage
PR Newswire
13-08-2019, 08:46 AM
Stop wasting time to look at SGX. there are plenty of potential bargains overseas
Local companies like Boustead and MTQ are not worth investing in long term, because they don't have much pricing power compared to major oil
Once the oil major pause CAPEX, these sub-sub con immediately need to tighten belt & shout for help.
BP, Exxon, Chevron could be better choice. Right now they suffer from negative sentiment with trade war
also people are negative about the future of oil due to electric cars. But overall, oil demand still rising due to pop growth
BP PLC - This 6% Yielding Stock Is On Sale
Summary
If you’re willing to swim against the current and go searching for yields in unexpected places, how about considering the energy sector?
ExxonMobil (XOM) and Chevron (CVX) might be the most likely targets in this space but the one name I’m favoring right now is BP (BP).
BP could be an interesting name to add for a modest yield boost.
This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Start your free trial today »
As usual, the utilities, consumer staples and real estate sectors have been the biggest beneficiaries of this rotation. But if you’re willing to swim against the current and go searching for yields in unexpected places, how about considering the energy sector?
Now, before you fall out of your chair, let me make the case.
Yes, investing in the energy sector right now is a risk-laden trade. Crude oil prices are down 20% from their 2019 highs as political tensions remain high, the ongoing trade war and generalized global economic slowdown stoke oil demand fears and crude stockpiles are at above average levels. I generally prefer sector ETFs to individual names since diversification helps eliminate concentration risk from any one company but the energy sector might be the reverse situation. In a struggling sector, you need to instead target individual names that are positioned to come out ahead in order to avoid getting dragged down.
ExxonMobil (XOM) and Chevron (CVX) might be the most likely targets in this space but the one name I’m favoring right now is BP (BP). Its relative valuation compared to its peers and the sector is attractive and its status as a strong free cash flow generator gives its forward yield of 6.6% a surprisingly high degree of safety.
BP’s stock has adequately rewarded investors over the past three years although the past year has been a bit of a disappointment.
![[Image: saupload_BX0tu6H4t7txhoYVeO88aeXMxo0Dx-r...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_BX0tu6H4t7txhoYVeO88aeXMxo0Dx-rrX9EMHxp7OmkYDqdtnnopmT8SCHxt-SZq3T5GkLDYrI25o4ZNvSNRlnBc-vWYN23DdjvXD1nRwHXAPGGX4EOZUEU0f6Feq696o4KZHPGs_thumb1.png)
The company has performed relatively well over the past year and its purchase of BHP’s (BHP) U.S. shale assets for $10.5 billion should be a positive over the longer-term but costly in the short-term. Add that to the remaining costs from the Deepwater Horizon settlement that are still outstanding and you’ve got some pressure on cash flows. With those factors nearly in the rearview mirror, BP may be poised to improve its liquidity even more over the next year.
And it’s all about the cash. The company’s Q2 investor presentation shows that cash flow has been more than sufficient to support capex, dividends and share buybacks.
![[Image: saupload_0UaoJ_yLeB8M3BX54buFR5VuonBfgy2...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_0UaoJ_yLeB8M3BX54buFR5VuonBfgy2zo_0yJa5TFh4DgS-ErvTS1utk4oPbs8B32em8ALTs12Y00_WOj93R_5vH70zU_-tUiQJW4ZP_sbOCLeaqCuXRdBSYfZWlMK1xvNFhXZT1_thumb1.png)
Looking at it another way, BP’s rolling 12-month free cash flow per share figure has been solid putting its free cash yield at 5.6% making it one of the more cash-rich companies in the world.
![[Image: saupload_6iiCLATEljW-bxp3n2kYoeVK1IYFAil...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_6iiCLATEljW-bxp3n2kYoeVK1IYFAilE0mTjBZTx18kk7-G_slDqD83p34f7qFsSFuX3BvTXFqEsp4C67HR5ZsfGA17FFKe5OS9ALCE8j8HJVIpCG-BCPXh_YpptT63phg7yxN1y_thumb1.png)
While the company’s dividend yield, its ability to support the yield and clear some short-term expenses off of its books, it’s important to be realistic here. As a total return investment, BP is going to be risky. As mentioned earlier, oil prices are already 20% below their 2019 highs and could easily be heading back to the $30s if the trade war extends indefinitely and economic growth globally continues to slow. In that scenario, BP and other names in the energy sector will likely continue to feel some pain.
But if you’re in retirement, for example, and want to live off of the income produced by your portfolio and not the principal itself, BP could be an interesting name to add for a modest yield boost. You probably don’t want to make BP a significant part of your income-producing portfolio but adding a smaller investment in this well-supported dividend could be a smart play.
Bottom line? BP’s stock is heavily oil dependent and given the current economic and political environment it will likely continue to face headwinds into the foreseeable future. But if you’re looking at the company’s balance sheet and its ability to pay the quarterly dividend into the future, there’s a lot to like here. One thing I would like to see, however, is BP transform into a dividend grower instead of a dividend payer. The company has increased its quarterly dividend only once since 2015. The yield is nice but not getting a regular pay raise is a little disappointing.
I also like the fact that the stock is trading at just 10 times 2020 earnings compared to 14 for both ExxonMobil and Chevron. This kind of valuation provides a degree of downside protection should the sector and the economy turn south, something that is a very real possibility over the next year.
Local companies like Boustead and MTQ are not worth investing in long term, because they don't have much pricing power compared to major oil
Once the oil major pause CAPEX, these sub-sub con immediately need to tighten belt & shout for help.
BP, Exxon, Chevron could be better choice. Right now they suffer from negative sentiment with trade war
also people are negative about the future of oil due to electric cars. But overall, oil demand still rising due to pop growth
BP PLC - This 6% Yielding Stock Is On Sale
Summary
If you’re willing to swim against the current and go searching for yields in unexpected places, how about considering the energy sector?
ExxonMobil (XOM) and Chevron (CVX) might be the most likely targets in this space but the one name I’m favoring right now is BP (BP).
BP could be an interesting name to add for a modest yield boost.
This idea was discussed in more depth with members of my private investing community, The Lead-Lag Report. Start your free trial today »
Quote:Don't get trapped by looking at what the price was that you paid for some stock originally. - Richard ThalerIn a recent Lead-Lag Report, I pivoted some of my discussion to dividend income strategies. With investors mostly preferring large-cap growth stocks, dividend stocks and ETFs have been a mixed bag over the past year - the aristocrats have done well but high yielders not so much. With 10-year Treasury yields dropping below 1.7% (and potentially going significantly lower), attention has shifted back to equities in order to find the yields that the fixed income market isn’t providing.
As usual, the utilities, consumer staples and real estate sectors have been the biggest beneficiaries of this rotation. But if you’re willing to swim against the current and go searching for yields in unexpected places, how about considering the energy sector?
Now, before you fall out of your chair, let me make the case.
Yes, investing in the energy sector right now is a risk-laden trade. Crude oil prices are down 20% from their 2019 highs as political tensions remain high, the ongoing trade war and generalized global economic slowdown stoke oil demand fears and crude stockpiles are at above average levels. I generally prefer sector ETFs to individual names since diversification helps eliminate concentration risk from any one company but the energy sector might be the reverse situation. In a struggling sector, you need to instead target individual names that are positioned to come out ahead in order to avoid getting dragged down.
ExxonMobil (XOM) and Chevron (CVX) might be the most likely targets in this space but the one name I’m favoring right now is BP (BP). Its relative valuation compared to its peers and the sector is attractive and its status as a strong free cash flow generator gives its forward yield of 6.6% a surprisingly high degree of safety.
BP’s stock has adequately rewarded investors over the past three years although the past year has been a bit of a disappointment.
![[Image: saupload_BX0tu6H4t7txhoYVeO88aeXMxo0Dx-r...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_BX0tu6H4t7txhoYVeO88aeXMxo0Dx-rrX9EMHxp7OmkYDqdtnnopmT8SCHxt-SZq3T5GkLDYrI25o4ZNvSNRlnBc-vWYN23DdjvXD1nRwHXAPGGX4EOZUEU0f6Feq696o4KZHPGs.png)
The company has performed relatively well over the past year and its purchase of BHP’s (BHP) U.S. shale assets for $10.5 billion should be a positive over the longer-term but costly in the short-term. Add that to the remaining costs from the Deepwater Horizon settlement that are still outstanding and you’ve got some pressure on cash flows. With those factors nearly in the rearview mirror, BP may be poised to improve its liquidity even more over the next year.
And it’s all about the cash. The company’s Q2 investor presentation shows that cash flow has been more than sufficient to support capex, dividends and share buybacks.
![[Image: saupload_0UaoJ_yLeB8M3BX54buFR5VuonBfgy2...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_0UaoJ_yLeB8M3BX54buFR5VuonBfgy2zo_0yJa5TFh4DgS-ErvTS1utk4oPbs8B32em8ALTs12Y00_WOj93R_5vH70zU_-tUiQJW4ZP_sbOCLeaqCuXRdBSYfZWlMK1xvNFhXZT1.png)
Looking at it another way, BP’s rolling 12-month free cash flow per share figure has been solid putting its free cash yield at 5.6% making it one of the more cash-rich companies in the world.
![[Image: saupload_6iiCLATEljW-bxp3n2kYoeVK1IYFAil...thumb1.png]](https://static.seekingalpha.com/uploads/2019/8/10/saupload_6iiCLATEljW-bxp3n2kYoeVK1IYFAilE0mTjBZTx18kk7-G_slDqD83p34f7qFsSFuX3BvTXFqEsp4C67HR5ZsfGA17FFKe5OS9ALCE8j8HJVIpCG-BCPXh_YpptT63phg7yxN1y.png)
While the company’s dividend yield, its ability to support the yield and clear some short-term expenses off of its books, it’s important to be realistic here. As a total return investment, BP is going to be risky. As mentioned earlier, oil prices are already 20% below their 2019 highs and could easily be heading back to the $30s if the trade war extends indefinitely and economic growth globally continues to slow. In that scenario, BP and other names in the energy sector will likely continue to feel some pain.
But if you’re in retirement, for example, and want to live off of the income produced by your portfolio and not the principal itself, BP could be an interesting name to add for a modest yield boost. You probably don’t want to make BP a significant part of your income-producing portfolio but adding a smaller investment in this well-supported dividend could be a smart play.
Bottom line? BP’s stock is heavily oil dependent and given the current economic and political environment it will likely continue to face headwinds into the foreseeable future. But if you’re looking at the company’s balance sheet and its ability to pay the quarterly dividend into the future, there’s a lot to like here. One thing I would like to see, however, is BP transform into a dividend grower instead of a dividend payer. The company has increased its quarterly dividend only once since 2015. The yield is nice but not getting a regular pay raise is a little disappointing.
I also like the fact that the stock is trading at just 10 times 2020 earnings compared to 14 for both ExxonMobil and Chevron. This kind of valuation provides a degree of downside protection should the sector and the economy turn south, something that is a very real possibility over the next year.
