Tuesday, July 22, 2008

oil purely for yield

When a company's prospects for earnings success are tied to the price of a commodity, some funny things tend to happen to it's share price. Throw in a rising dividend and a higher yield and things get even more interesting.

Case in point are oil stocks right now. Most oil stocks in Canada are fairly low yielding but Husky Energy (HSE) stands out in offering a higher dividend yield to investors. Recently as oil climbed from under $100 to around $147 oil stocks soared with sentiment all around claiming high oil was here to stay and that we could hit $200/barrel quickly. Since then oil has begun to come off as it is now flirting with $125/barrel. Evidence exists that high oil is curbing demand, and that the U.S. economy is slowing. These factors along with the usual speculative trading dynamics seem to have turned the bus around.

Anticipating this move, the stocks of the oil companies themselves have been falling. So much so that Husky Energy (HSE) has actually come off about 23% since May 21. The energy ETF (XEG) has come off about 18% during the same time frame. What makes the move down by Husky so intriguing to me is that the stock pays a nice, rising dividend. Husky is now yielding almost 4% and sports a dividend pay out ratio of earnings of about 35%. If you expect the world's insatiable appetite for oil to continue, and expect per barrel prices to leave double digits as a distant memory, take note. Remember, oil is still well above it's average price over the last few years.

For every $1,000 invested, Husky is paying you $40/year currently and this will likely rise as their fortunes rise with oil and oil demand. As the sentiment mounts and oil trades lower it is no fun to have the value of your oil stock fall. However, a nice yield certainly cushions that fall and allows you to pick up more yield or at least get paid while you wait for your holding to appreciate with the global demand for energy. In my opinion this is a very low risk yield with minimal downside and major upside potential. If your investment strategy focuses on dividends and dividend growth, as mine does, then a 4% yield on a non-financial stock that adds diversity to a portfolio is interesting to say the least.


Dividend Growth Investor said...

That sounds great. I actually managed to scoop up some XOM last week on the dip below $80. Sure the dividend is 2%, but hey this company is older than some countries out there.

MillionDollarJourney said...

I started accumulating HSE yesterday. Only a small position though.

Sarlock said...

Funny you should bring up HSE's recent drop in price, I was just thinking the same thing yesterday!

Sarlock said...

HSE just posted their 2nd quarter earnings and WOW are they nice.
Be interesting to see what their stock price does tomorrow, though I imagine it is already figured in to the price (their Q2 numbers are no surprise, really).

POL said...

CALGARY, ALBERTA, Jul 23, 2008 (MARKET WIRE via COMTEX) -- Husky Energy Inc. (CA:HSE: news, chart, profile) announced today that the Board of Directors has approved a 25 percent increase in the Company's quarterly dividend to $0.50 from $0.40 (Canadian) per share on its common shares for the three-month period ended June 30, 2008. The dividend will be payable on October 1, 2008 to shareholders of record at the close of business on August 22, 2008.
The increase in the dividend payment reaffirms the Board's confidence in the Company's business strategy in value creation allowing its shareholders to benefit from the strength of the Company's financial performance in this high commodity price environment.
Husky Energy is a Canadian-based integrated energy and energy-related company headquartered in Calgary, Alberta. Husky Energy is publicly traded on the Toronto Stock Exchange under the symbol HSE.