COP or XOM?

[TomK]

What do you think? I want to add some more oil company action to my portfolio. My read says that COP is the obvious choice, but hard not to be tempted by XOM's quality name.

[Kerim]

I think those are both solid adds, and if you currently have neither, it is kind of a win-win scenario. You could also of course pick up some of each. That said, I tend to agree with your leaning toward COP.

Probably what carries the day for me, if I had to choose, is the COP’s dividend yield over 4 percent as compared to XOM’s under 3 percent. I also think of COP as a smaller company, which may mean it can be more nimble. After the PSX spinoff it is doing a lot of restructuring of its assets which could really pay off in a few years.

P/E and earnings growth are in the same ballpark for the two. XOM’s payout ratio in the mid-20s is nicer than COP’s in the low 40s, but both are in the “very comfortable” range for me.

The one area where XOM fares well in this comparison is dividend growth and consistency. XOM has raised the dividend consistently each year for 30 years, and you can count on them to do it again this year, with a five-year dividend growth rate in the 9 to 10 pecent range. COP on the other hand, had a good 11 or 12-year streak coming into 2012. Although technically the dividend was not raised in 2012, I give them credit for a 2012 raise because the PSX spinoff reduced the income base, and if you were holding shares of COP at the time, you received shares of PSX with its own dividend, which in my mind counts as a healthy raise from COP in 2012. But whether COP will raise the dividend to keep the streak going in 2013 is anybody’s guess. Tim McAleenan has a good run-down of the issue here.

All in all, I’d say you’re fine either way. But I find the higher starting yield of COP compelling, and I trust that over time, the dividend will be increased.

[TomK]

Thanks for your thoughts -- they are generally in line with my own. interestingly, I note that COP announced its Q2 dividend today. 66 cents per share. So no 2013 increase yet!

[bobbyboy1970]

Hang on a minute. I know I'm the newbie here, but is COP even a dividend GROWTH stock at this point? If the dividend isn't growing, then doesn't it fail that test?

[Kerim]

Depends how strict you want to be, bobbyboy. Technically, COP did not raise the dividend in 2012. Total dividends in 2011 were $2.64, and total dividends in 2012 were $2.64. As I mentioned earlier, personally, I am considering COP's dividend growth streak to be alive and well through 2012 because they paid out $2.64 despite spinning off a huge chunk of the company (PSX). Relative to the now smaller COP that remained (with its smaller asset and earnings base), the $2.64 in dividends in 2012 was bigger than the $2.64 in 2011.

Now, if they do not raise the dividend in 2013, it becomes much harder to defend the streak. Some might argue that the spinoff was so major and accounted for such a large potion of revenues and earnings that COP should be given credit for more than one year of dividend increases, and hence be given a pass in 2013 as well. Other might argue that if you held COP before the spinoff (as I did), you sum your dividends from COP and PSX to see if the streak is still alive, since the income from your initial investment is still growing. That is a bit of a stretch for me, but I see the logic. Finally, still others might shrug and say that yes, COP's streak is over, but it is nonetheless a great company with a solid yield so it is still worth holding onto. I fall into this latter camp.

Who knows, perhaps we'll get a divvy raise in 2013 after all. If not, I'll continue to monitor and decide what to do down the road.

[TomK]

Just saw a blurb that COP is indeed raising the dividend in 2013! Increasing from $0.66 per quarter to $0.69 per quarter. A modest increase to be sure, but an increase nonetheless, keeping the streak alive. And the yield was already pretty healthy. Good news indeed. This removes a big question mark for me about COP. Here's the link.