After weeks of historic uncertainty, global stock markets are quickly settling down from now what is now nearly a month of record share price volatility. It appears that social distancing is helping slow new cases of the coronavirus, and there is hope that the global economy will return back to normal. Many stocks have bounced significantly from their lows because of this hope, but there are still plenty of deals to be had.
Some well capitalized energy firms, which are already operating in uncertain times as many economies around the world remain in standby mode from the social distancing required to keep covid-19 at bay, are also having to deal with a dramatic drop in oil prices. This was brought by production disagreements between major producing countries, including Russia and Saudi Arabia, and a major oversupply of oil. In many parts of the industry, the companies that generate strong cash flows also have generous dividend payouts.
But not all energy companies are created equal. The below firms are not directly dependent on oil prices for their profits and cash flow that they use for dividend payments. The sudden (but temporary) drop demand is certainly a near-term concern, but should improve quickly as people return to work. A recent screen in TipRanks database helped uncover important details on these three high-powered dividend stocks. Let's take a closer look.
Valero Energy Corp (VLO)
Valero is a pure play refiner. In its words, it has “premiere assets and low cost operations.” As one of the largest refiners out there, it’s hard to argue with them. Its 15 refineries support 3.2 million barrels per day (BPD) and its has over 3,000 miles of pipelines to market and distribute the fuel it makes. It’s a disciplined capital allocator, and though the current environment is adversely affecting demand, conditions should soon return back to more normal conditions.
RBC Capital's Brad Heffern has Valero on its “Global Energy Best Bets Ideas” list and believes that the firm is “positioned to take advantage of global crude oversupply and a low position on the cost curve.” It also cited the “high complexity” of Valero’s refining operations, which is a good thing as it allows it to tactically shift refining to areas seeing higher demand, and/or better margins.
Speaking of the dividend, Heffern sees “less risk of a dividend cut” compared to the peer group. Indeed, in the previous three fiscal years Valero has generated average operating cash flow of around $5 billion. Subtracting out an average of $1.5 billion to grow and maintain its extensive refiner facilities has left about $3.5 billion annually to buy back stock and pay the dividend. The dividend requires $1.5 billion, which is right at its target to pay out 40% to 50% of that free cash flow. So, looking back there appears to be plenty of cushion to fund and support the dividend payout. Overall, annualized, Valero's dividend comes out to $3.92, giving a yield of 8.5%.
Unsurprisingly, Heffern rates Valero shares a Buy along with a $59.00 price target -- 15% upside from current levels. (To watch Heffern's track record, click here)
Wolfe Research said it even more succinctly in a recent research note on Valero. Lead analyst Sam Margolin sees “ample liquidity, no [debt] maturities near term, and upside leverage with dividend growth.” We like the vote of confidence, and patience in the current environment that should only continue to settle down.
All in all, among of the 10 analysts who've ventured an opinion on Valero in the last month, each and every one of them put a "buy" rating on the stock. The overwhelming consensus is that Valero shares should be worth $75.44 per share over the next 12 months. So, the message is clear: Valero is a Strong Buy. (See Marathon Petroleum stock analysis on TipRanks)
Kinder Morgan (KMI)
Oil and gas pipeline operator Kinder Morgan stresses that its business is driven by fee-based arrangements that are “entitled to payment regardless of throughput.” This implies its business is not driven by the swings in commodity prices and should insulate it from the current dramatic drop in oil prices.
Also importantly, UBS analyst Shneur Gershuni detailed in a recent report that 80% of Kinder’s business is tied to natural gas and refined products, not crude oil. Gershuni also cited Kinder’s balance sheet strength, which was relayed in a discussion with Kinder CEO Steven Kean. He noted that Kinder still plans to boost its dividend another 25% this year, continuing a trend to boost its annual payout. The dividend is currently $1 per share and will go up to $1.25 for a current dividend yield of 7%, based off the current share price of $14.72.
It's not surprising, though, why Gershuni reiterated his Buy rating on KMI shares along with a $26 price target. Should the target be met, investors pockets will jingle with returns in the shape of 77%. (To watch Gershuni's track record, click here)
Turning to Kinder’s cash flow statement, its bias toward self-funding its operations is apparent. Operating cash flow production has average just below $5 billion over the past three annual periods. Capital expenditure, or the investment to grow and maintain its pipeline operations, was $2.3 billion, leaving $2.7 billion in free cash flow. That suggests there is ample room to continue and expand the payout to shareholders. Kinder is also paying down its debt over time. All good signs.
When looking at Wall Street’s stance, Gershuni is not the only bull, as TipRanks analytics showcase KMI as a Buy. Out of 12 analysts polled in the last 3 months, 8 rate KMI a Buy, while 4 suggest Hold. Meanwhile, the 12-month average price target stands at $18.58 marking a 26% upside from where the stock is currently trading. (See Kinder Morgan stock analysis on TipRanks)
Marathon Petroleum (MPC)
Marathon Petroleum has some diversification that, despite the past saber rattlings by activist investors, is helping it through the current economic woes brought by fighting covid-19. It is an oil refiner, energy pipeline owner and facilitator, and, best know to most consumers, operates gas stations under the Marathon and Speedway brand names.
Refining operations make money based off the price differentials, or spreads, of various types of oil. For instance, heavier, dirtier oil (think Canadian oil sands or Venezuelan oil) can trade at a higher price, which can make it more profitable for refiners to, well, refine, compared to lighter (and sweeter) grades. Gasoline margins at gas stations also oscillate based off of market demand and supply. Diesel and regular gasoline spreads also impact what Marathon chooses to refine. Its complicated stuff, but Marathon has its hands around how to navigate the spreads.
Income was enough to raise the dividend to 58 cents. The annual payment, $2.32, gives the stock a yield of 10%, far higher than the 2% average dividend yield found on the broader markets. Marathon has a reliable dividend history, and adjusts the payment when needed to ensure that the company can afford the dividend.
Marathon had been mulling over caving to activist investor demands, but for now it is not selling its gas stations and looks to be keeping the structure of its pipelines (midstream assets) intact. In a report on March 18, research firm Jefferies sees the decision to keep its relationships with its pipeline entities as a “positive”, and noted the hiring of a new CEO (Michal Hennigan) as the removal of another overhang.
Lead analyst Christopher Sighinolfi ended his most recent report by suggesting MPC is a “deeply discounted security[y] and sees catalysts in the spin out of the gas stations and stock buybacks as catalysts to push the stock back toward recent highs.
As a result, Sighinolfi reiterated a Buy rating on MPC shares alongside a $74 price target, which implies nearly 200% upside from current levels. (To watch Sighinolfi's track record, click here)
What does the rest of the Street have to say? As it turns out, other analysts are in agreement. 7 Buys and 3 Hold ratings add up to a Moderate Buy consensus rating. The $62.11 average price target puts the upside potential below Sighinolfi’s forecast at $62.11. (See Marathon Petroleum stock analysis on TipRanks)
Disclosure: The author has a long position in MPC and KMI.
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