Big Oil Doesn't Equal Big Dividends

Todd Shriber
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No, 2010 has not been a picnic for equity investors, but complaints aside, this has been one of the better years in recent memory for dividend increases and share buyback programs, the two most direct ways a management team can reward investors after capital growth.

After the dividend tragedy that was 2009, income investors have fared far better in 2010 and dividends are all the more appealing in a deflationary environment where money markets and Treasuries are hardly worth the trouble. As a recent Bloomberg piece on dividends put it, there are almost 70 members of the S&P yielding better than the 3.8% average you would get in the credit markets.

At the sector level, excluding mega-cap banks and technology issues, investors have plenty of choices when it comes to garnering yield and decent payouts, but one industry that may not be all it is cracked up to be in terms of dividends is the energy patch. Since the energy sector designation encompasses so many companies, allow me to be specific: Strip out master limited partnerships and royalty trusts in the oil arena and you could find that big oil is a big dividend disappointment.

To be fair, Exxon Mobil, Chevron, ConocoPhillips and Occidental Petroleum, the four largest U.S. oil companies have all raised their dividends this year. Conoco's (COP)dividend increase, announced in March, was 10% and accompanied by a shareholder-friendly $10 billion repurchase plan. Occidental (OXY) raised its payout and has done so every year since 2002 while Exxon (XOM) and Chevron have streaks of dividend increases that span more than two decades each. Still the average yield of these four stocks is a less-than-awe-inspiring 3.2%.

Throw in BP's (BP) dividend suspension and an almost non-existent yield from Petrobras (PBR) and the pickings are slim in the integrated oil space for dividend investors. It gets worse with independents like Apache (APA) and Anadarko (APC) which have an average yield of 0.65%. Oil services stocks? This arena is another roll of the dice.

National Oilwell Varco (NOV) recently started paying a quarterly dividend of 10 cents a share and the company did issue a $1 special dividend to go along with the quarterly announcement, so at least NOV is on the right dividend path. On the other hand, Diamond Offshore (DO) canceled a special dividend in the wake of the Gulf oil spill due to a spate of force majeure claims, a painful move because as long-time DO shareholders know, the company's ''special'' dividends are a regular event.

Transocean (RIG) could be interesting if the company wins its appeal to pay a quarterly dividend of 82 cents. Call Transocean a $60 stock and that works out to a nice yield of almost 5.5%, but the company's dividend plan is nothing more than a big ''if'' at this point.

All of this leaves the dividend investor that wants yield and oil exploration and production exposure with two choices: Royal Dutch Shell (RDS-A) and Total (TOT), Europe's largest and third-largest oil companies, respectively. Credit Suisse issued a report on Monday that said Exxon and Chevron (CVX) should raise their dividends to bring their yields more on par with the 6% offered by their Dutch and French counterparts. Only time will tell if that happens, but there is no need to wait when the choice is quite clear for those seeking yield among integrated oil names.