Friday, January 30, 2015

Stock Purchase: NOV

On 01/28/2015, I bought 50 shares of National Oilwell Varco, Inc. (NOV) at $55.99.

Recently I took advantage of oil price plunge and accumulated shares in companies related to oil industry, such as CVX, XOM, NOV, and HP

National Oilwell Varco is a leading worldwide provider of equipment and components used in oil and gas drilling and production, oilfield services, and supply chain integration services to the upstream industry.  NOV provides all the heavy equipment necessary for oil and gas drilling, including rigs, derricks, rotarys, blowout preventers, mud pumps, wireline winches, cranes, drill pipes, drilling motors, drill bits, and transfer pumps, among many other products. They are apparently a one-stop shop for their clients.



NOV is an exceptionally well-managed company, which we can see from my stock purchase criteria.  This company passed all my criteria.



NOV is one of the companies in David Fish's Dividend CCC list.  It is a dividend challenger with 6 years consecutive dividend increase.  NOV has a S&P quality ranking B+, and Morning Star offers a generous 5-star rate to this company.

NOV pays dividends quarterly.  The last time it raised dividend was in Jun, 2014 with an increase rate 77% from $0.26 to $0.46, which makes the new annual dividend amount to $1.84.  With my purchase price at $55.99, my yield rate is 3.28%. Quite decent!

Currently NOV's payout ratio is 23.50%, which leaves large room for future dividend growth.  The average DGR in the past 5 years is 50%.  It's Chowder number is 80.97%, reflecting high current yield and high growth of the yield.  With the current turbulent oil prices, I won't expect much dividend growth in one or two years.  But in the long run, I have confidence that NOV's dividend will increase even more.

NOV's 10-year EPS growth rate is 31%.  It has a very low debt/equity rate at 14%.  Below chart illustrates the amounts of EPS, Free Cash Flow (FCF), and annual dividend.  The chart proves that NOV has healthy finances and a lot of room for dividend increase.


 NOV stock price plunged this week because Credit Suisse downgraded NOV to an Underperform rating from Neutral and lowered its target price to $43 from $60.  I believe this offers an excellent opportunity for long-term investors.

Disclosure: Long NOV.

Thursday, January 29, 2015

Stock Purchase: BBL

On 01/29/2015, I bought 30 shares of BHP Billiton PLC (BBL) at $42.65.

This is my third purchase of this company stock.  The first purchase was made on 11/12/14 with 22 shares at $52.13, and the second one was made on 12/02/14 with 25 shares at $47.30. With the new addition, I was able to average down my average cost to $47.02.

I first heard about this company from Dividend Mantra.  His excellent detailed analysis in several articles convinced me that this company is a good candidate for DGI portfolio. 

First, let's see if BBL meet my stock purchase criteria.

 

From above criteria check list, BBL is very juicy with 5.27% dividend yield.  The payout ratio is also sound less than 50%.  10-year dividend growth rate (DGR) averaged at 22.17%.  Recent 5-year average DGR is slower at 8.9%.  I could expect that in the next two years the DGR rate would be flat.  But with 5.27% as the starting point, I have enough patience to wait for the long run higher DGR.

I didn't bother to check the price discount, because current market is panic and lowered 1-year targets (for example, S&P Capital IQ 1-year average is $36, while MSN money set the 1-year target at $25.09. )  This article analyzed very well about the industry risk (especially iron ore), and BBL's strength in this industry, even during the downturn.  I totally agree with the author that, "The fall of the iron ore price will come to an end sooner or later, and the current share price levels might already present attractive entry points to buy into this market. Since we might see further declines in the next months to come, I personally prefer to reduce the risk and to concentrate on the strongest players in the industry for the time being. One of these stocks is BBL, which offers an attractive and most likely sustainable dividend, which makes it easier to wait for the profits to come in."

Disclosure: Long BBL.

Tuesday, January 27, 2015

Stock Purchase: CAT

Today on 01/27/2015, I purchased 30 shares of Caterpillar Inc.(NYSE:CAT) at $79.85 per share.

CAT reported its Q4 earnings result today. Share price plunged 7% due to lower than expected earnings result.  2014 Q4 sales and revenues is $14.244 billion, slightly down from $14.402 billion in the fourth quarter of 2013.  Profit per share in the fourth quarter of 2014 was $1.23, compared with profit per share of $1.54 in the fourth quarter of 2013. The major reasons contributed to the disappointing result is the relatively slow growth in the world economy and continued weakness in commodity prices, particularly oil, copper, coal and iron ore.


Caterpillar reduced its sales outlook for 2015 as current oil prices remain a “significant headwind.” In 2015, Caterpillar expects sales to decrease 10 percent from $55 billion 2014 to $50 billion.  The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in Caterpillar’s sales volume and revenue outlook for 2015. Prices for mined commodities such as copper, coal and iron ore have continued to decline, and order rates for mining equipment have remained at low levels. Lower expectation for sales in China and strong U.S. dollar also contribute to negatively impact 2015 sales.

CAT is the world's largest producer of earthmoving equipment, and a big maker of electric power generators and engines used in petroleum markets, and mining equipment. As the world’s largest manufacturer of construction and mining equipment, When Caterpillar Inc. isn’t doing well, the global economy isn’t doing well.  Considering the highly cyclical nature of Caterpillar's industry, stock prices fluctuate with time.  However, I have confidence that $80 or below is a entry price.

In this article, I analyzed that CAT meets my 10 out of 11 purchase criteria.


Criteria
CAT indicators
CAT check result
Note
Dividend CCC list
Dividend contender
V
Contender with 21 years of dividend payment.
S&P Capital IQ
4-stars
V
Buy/4-stars
Morning Star
3-stars
V
3-stars
Dividend yield
3.30%
V
Greater than 3%
Payout ratio
45.31%
V
Less than 60%
10-year dividend growth rate
12.79%
V
Greater than 5%
Chowder number
12.19%
V
Greater than 12%
10-year EPS growth rate
$5.14
V
Stable and uptrend
Free cash flow
Positive
V
Greater than dividend payout on average
Price discount
20.5%
V
Fair price $101.19, market price $84.
Debt to equity
1.50
X
Much higher than 50% criteria

This article excellently summarized the dividend history.  Caterpillar has increased annual dividends in the last 20 years in a row since 1994. Caterpillar has traditionally announced dividend increases in mid-June with the stock going ex-dividend in mid-July. It is expected that Caterpillar will announce their next dividend increase in June 2015.




In its Q414 earnings release, CEO Doug Oberhelman re-emphasized their plan on stock re-purchase.  Citing from the CEO, "In the first quarter of 2014, the Board of Directors approved a $10 billion authorization which expires in December 2018. At the end of 2014, we had $7.5 billion remaining in the authorization. Our strong balance sheet and cash position provide us with the ability to repurchase additional stock. We expect our repurchase activity to be consistent with our stated cash deployment priorities and are considering
additional repurchases in 2015.

All in all, Capterpillar is a strong company with solid fundamentals.  I am happy to get in at around $80 and collect dividends at a decent yield rate 3.5%, while patiently waiting for the stock price to bounce back.

Disclosure: Long CAT.  I currently have sold CAT Jan 2016 85 Put.



 

Tuesday, January 20, 2015

Energy investing basics



Recently crude oil price dropped a lot, which presented a very good opportunity for long-term dividend investors, so the focus of many DGIs turned to energy stocks.  However, there are so many energy related stocks, besides the big names such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), what else do you know?  What are their differences?  How do you evaluate their performance?  These are simple questions yet confusing enough for a green hand like me.  Fortunately, I found the series of article from fool.com regarding energy investing 101 and learned a lot from them.  Thus, I make a summary here for future easier reference.

Integrated majors or Big Oil (source here for your detailed study)

These companies deal with the entire value chain of oil and gas: exploration and production, midstream pipelines, refining and chemical production, and retail and marketing.  Here is a list of the 10 largest integrated oil and gas companies that trade on the major US exchanges by market capitalization and production of oil and gas.
Company
Market Capitalization ($Billion)
Total Production (thousand barrels of oil equivalent per day)
% of net income from exploration and production activities
Production mix (liquids/gas as % of production)
ExxonMobil(NYSE: XOM)
$430.3
4,018
85.2
52.6%/47.3%
Chevron(NYSE: CVX)
$236.1
2,585
95
66.8%/33.2%

PetroChina (NYSE: PTR)
$227.8
3,807
106
67.1%/32.9%
Royal Dutch Shell (NYSE: RDS-A)
$225.1
3,262
77
50.6%/49.4%

BP (NYSE: BP)
$147.7
2,259
89
51.9%/48.1%
Total (NYSE: TOT)
$136.7
2,299
78
51%/49%
Petrobras (NYSE: PBR)
$90.0
2,314
172
83.1%/16.9%
Eni (NYSE: E)
$85.8
1,653
124
51.6%/48.3%
Statoil (NYSE: STO)
$75.7
1,852
74
60.3%/39.7%
Occidental Petroleum (NYSE: OXY)
$75.1
767
90
73.4%/26.6%
Above chart also lists out what you should look at when you do research on these companies. Exploration and production are the major activities that all these companies income comes from.
The three P's of research:-
·         Property -- see if a certain locale is a red flag for a company.  
·         Production -- know production mix of each company.
·         Projects -- what does the future hold? (project potential, project risk, and project on-time & budget?)


Refining stocks (source here for your detailed study)

Refining companies transforms crude oil into thousands of different products that we use on an everyday basis.  The most common products you and I know are gasoline and diesel (most valuable ones), but other common products include asphalt and bitumen for paving and construction, organic chemicals for the manufacture of plastics and synthetic fibers, or even waxes and lubricants.  Refiners make their money is to sell all of these products for more than the raw-material costs.

Here is the list of some public companies in the U.S. that are considered refining and marketing specialists:
Company

Complexity
Cost efficiency
Cash conversion
Refining Capacity (in Thousand Barrels of Oil Per Day)
Nelson Complexity Index
Refinery Utilization
Operational Costs Per Barrel of Produced Product
Average Levered Free Cash Flow Margin (Q3 2009-Q3 2013)
Average Return on Capital (Q3 2009-Q3 2013)
Valero (NYSE: VLO)
2,900
11.1
95%
$5.49
1.67%
10.90%
Phillips 66 (NYSE: PSX)
2,200
11.4
93%
$6.64
0.67%
5.70%
Marathon Petroleum (NYSE: MPC)
1,699
11.6
94%
$8.21
1.92%
13.20%
Tesoro (NYSE: TSO)
849
9.5
98%
$7.06
0.78%
8%
PBF Energy (NYSE: PBF)
540
11.3
86%
$6.33
-0.14%
11.90%
HollyFrontier (NYSE: HFC)
443
12.1
95.20%
$6.11
2.41%
9.40%
CVR Refining LP (NYSE: CVRR)
185
11.5
111%
$8.03
2.37%
17.90%
Calumet Specialty Products Partners LP (NASDAQ: CLMT)
180





Western Refining (NYSE: WNR)
151
8.2
100%
$8.86
2.80%
19.30%
Alon USA Energy  (NYSE: ALJ  )
147
9.4
92%
$8.20
1.89%
5.90%
Delek US Holdings (NYSE: DK  )
143
9.2
101%
$6.02
-0.87%
10.50%
Northern Tier Energy LP (NYSE: NTI)
96
11.5
98%
$5.53
1.93%
24.20%


Independent oil & gas stocks (source here for your detailed study)

Unlike integrated oil and gas companies, independents exclusively produce oil and gas. That means no downstream assets like refiners or retail arms. In some ways, it makes them much easier to understand, because you don't have to sift through multiple business segments to identify the primary driver of profitability for the company.  An familiar example is ConcoPhillips (NYSE: COP).

Five key points to consider :-
·         Production potential: Go beyond just proved reserves
·         Reserves to production ratio
·         Reserve replacement costs
·         Production costs vs. production mix
·         Operational cash flow coverage of capital expenditures