(Bloomberg) – Soaring oil prices have helped make oil and gas producers the best performers in the stock market this year, triggering a rapid increase in dividend payouts and a bonanza of special dividends.
Now, some investors think those big returns are here to stay even if crude prices pull back $100 a barrel — turning oil and gas producers from high-risk, high-reward bets into sure-return investments. With earnings season approaching and stocks down more than 20% from their June peak, the market is about to see how determined companies are to keep those payouts high.
Dividend payouts from major energy companies skyrocketed in the third quarter, whetting investor appetite. S&P 500 Energy Index companies paid $16.4 billion in cumulative dividends, up 15% from $14.3 billion in the second quarter and a whopping 49% from the $11 billion it a year ago, according to data compiled by Bloomberg.
“It’s golden times for dividends and buyouts,” said Eric Nuttall, partner and senior portfolio manager at NinePoint Partners in Toronto. High commodity prices allowed energy producers to aggressively pay down debt, establishing a stable payout for shareholders, he said.
Currently, oil-producing stocks offer higher returns than so-called high-yield indices. The Energy Select Sector SPDR (XLE) fund, which holds large-cap energy companies, has seen dividend growth of 41% over the past year and yields a yield of 4.2% compared to the dividend yield of 3.2% of the Vanguard High Dividend Yield ETF (VYM). . Oil producers also beat the S&P 500 “dividend aristocrats,” stocks with a reliable track record of rising annual payouts. The return of the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) is 2.2%.
“The industry has seen a permanent transition to a near-high-yield income space,” said Morningstar analyst David Meats. “But that doesn’t mean the numbers you see today will persist.” The current high yields offset the additional risk investors see in these cyclical stocks, he said.
As investors are paid, there is also a price for oil and gas producers.
“Energy is trying to get out of the penalty box,” said Stacey Morris, head of energy research at Alerian VettaFi, noting that the dividend hike aims to attract new long-term investors and reduce volatility. cyclical stocks of oil producers. There is evidence that energy stocks are becoming less volatile and decoupling from crude swings in part because of those big payouts, she said.
The question is whether they can keep those high dividends if oil prices fall further. “What proves your ability to pay a dividend is a downturn,” she said.
Getting the answer to this will take time. Dividend Aristocrats are awarded the title after raising dividends for 25 consecutive years. There are only two oil and gas producers, Exxon Mobil Corp. and Chevron Corp., among the 64 S&P 500 dividend aristocrats.
New bets
Some portfolio managers make long-term bets on the earning potential of the sector. Ninepoint Partners of Toronto, for example, has launched a new energy income fund that is 85% weighted toward oil and gas producers. Its largest holdings are oil sands producer Cenovus Energy Inc., natural gas producers Chesapeake Energy Corp. and Coterra Energy Inc., and shale darling Devon Energy Corp.
“Oil and gas is no longer this poverty-to-rich, boom-to-bust investment,” Rafi Tahmazian, Canoe Financial partner and senior portfolio manager, said over the phone.
The Canoe EIT Income Fund includes oil and gas names Tourmaline Oil Corp., ARC Resources Ltd. and Canadian Natural Resources Ltd. among more traditional income stocks like insurance companies, banks and cigarette manufacturers. Tahmazian seeks larger energy companies with higher quality resources for its revenue portfolio. He is drawn to their sustainable dividend yields, rather than smaller, riskier companies.
Yet not all long-time income investors agree with oil and gas producers.
“The oil industry is hard on capital, that’s the right way to put it,” Energy Income Partners chief executive Jim Murchie said by phone. These companies “spend what they earn” rather than hold cash for shareholders, he said.
“I don’t think leopards change their spots,” he said.
This is the dividing line for income investors. Both Tahmazian and Nuttall say energy producers have shown spending restraint in the face of rising earnings, and capital discipline makes them confident of sustaining dividends over the longer term.
“Spending has dried up,” Tahmazian said. “It’s the easiest investment of my 31 years.”