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What Happened to Oil Stocks?

What Happened To Oil Stocks? – Dividend Power Week In Review

What Happened to Oil Stocks?

Some oil stocks are trading at their lowest level in almost 20-years. So, what happened to oil stocks? For example, Exxon Mobil Corporation (XOM) is trading at about $34 per share at market close this past Friday. This is the lowest since about 2003 not including the severe downturn at March 2020. Exxon Mobil’s market capitalization has plummeted to $144 billion. Since the yield is a function of stock price it has spiked to over 10%. This sounds tempting but it’s not a reason to buy Exxon Mobil in my opinion. When yields get this high it has historically been a warning sign that it is unsustainable.

What Happend to Oil Stocks?
What Happened to Oil Stocks?

For perspective, Exxon Mobil was at one time the largest stock by market capitalization. Those days are long gone though as mega cap tech stocks have taken over the top spots. To add injury to insult, Exxon Mobil was briefly passed by Chevron (CVX) in market capitalization.  But even Chevron’s stock price is trading at levels last seen in 2009.

What Happened to Oil Stocks Dividends?

In general oil stocks have been a source of wealth generation for many decades. But that is no longer the case. The devastation across the oil industry has been severe due to the coronavirus pandemic, too much supply, and lower demand. Even well run oil companies have suspended or cut their dividends. This includes many companies that have been dividend growth stocks or reliable sources of income for many years. For example, Royal Dutch Shell (RDS.A)BP PLC (BP)Occidental Petroleum (OXY), and Helmerich & Payne (HP) have suspended or cut their dividends. The dividend cut by Helmerich and Payne was a shocker for some since the company was only a few years away from becoming as Dividend King.

Even once mighty Exxon Mobil (XOM) is struggling to pay its dividend. The company experienced its first back-to-back quarterly losses in 36 years. The company is trying to conserve cash and maintain the dividend. Reportedly, the company is no longer matching 401(k) contributions. Other oil majors have cut employees and Exxon Mobil is likely to follow the same route. Currently, Exxon Mobil’s dividend requires about $15 billion annually. Since the company is not profitable and quarterly operating cash flow does not currently cover the dividend, this is obviously not sustainable. If demand and oil prices do not recover, then it is possible that Exxon Mobil will join the list of companies suspending or cutting their dividend. Furthermore, to add insult to injury, Exxon Mobil was replaced in the Dow Jones Industrials Average (DJIA).

What Happened to Demand and Supply for Oil Stocks?

Therein lies the problem though. Oil demand is low due to the coronavirus pandemic. People are saving money during COVID-19 if they are not commuting and not really traveling. It has recovered since March and April. But with many employees still teleworking and virtual learning still in place demand will be muted through the end of 2020 and into 2021. Several companies have come out and stated that employees can work from home even after the pandemic subsides. It is possible that the changes in demand for oil and gasoline are more permanent than many people think.

Next, electric vehicles sales are rising globally cutting into oil demand. Additionally, the use of diesel and jet fuel is also down for ships, trains and planes further reducing demand. On the supply side there is too much supply and too much oil in storage. The cost of producing oil continues to drop due to technological advances. This means that if prices rise, more oil wells will come online whether fracking or deep water and keep supply elevated.

There were some who were forecasting a rapid recovery in oil prices. They viewed COVID-19 as a Black Swan event in this context. But seemingly, newer forecasts are indicating that the coronavirus pandemic will adversely affect global energy demand for longer than expected. This will keep pressure on oil stocks and the dividends in the foreseeable future. So, now you know what happened to oil stocks? I am personally staying away from oil stocks for now.

What is the Market’s Perspective on Oil Stocks?

Energy stocks reportedly made up almost 17% of the U.S. stock market in 2008 and almost 30% in the early-1980s. Currently, it is now the smallest of all sectors in the U.S. at about 2.2% according to the sector breakdown from the Vanguard Total Stock Market ETF (VTI) at the end of Q2 2020. Energy only makes up about 1.9% of the fund. That’s pretty low. The two next smallest sectors are Basic Materials and Real Estate, which are also being hurt during the COVID-19 pandemic.

What Happened to Oil Stocks?

The problem is that the energy sector’s underperformance goes back for more than a decade. If we look at the Energy Select Sector SPDR ETF (XLE) then the trailing returns are negative for the past 1-year, 3-years, 5-years, 10-years, and 15-years (using month end data). It goes without saying that those returns are awful. I believe that the issue is structural due to changes in demand and supply as I outlined above. Overall, I am glad that I personally do not directly own any energy stocks.

What Happened to Oil Stocks?


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Dividend Increases and Reinstatements

Stepan Company hiked the regular quarterly cash dividend 10.9% to $0.305 per share from $0.275 per share. This is the 53rd consecutive annual increase. The stock is a Dividend King.

Lincoln Electric Holdings (LECO) raised the regular quarterly cash dividend 4.1% to $0.51 per share from $0.49 per share. This is the 26th straight annual increase making the stock a Dividend Champion.

Brunswick Corporation (BC) increased the regular quarterly cash dividend 12.5% to $0.27 per share from $0.24 per share. The is the 8th increase in a row. The stock is a Dividend Challenger.

American Electric Power (AEP) announced a 5.7% increase to the regular quarterly dividend to $0.74 per share from $0.70 per share. The is the 11th consecutive increase making the stock  a Dividend Contender.

Avery Dennison Corporation (AVY) hiked the regular quarterly dividend 6.9% to $0.62 per share from $0.58 per share. This is 10th straight annual increase. The stock is now a Dividend Contender.

Amphenol Corporation (APH) increased the regular quarterly dividend 16% to $0.29 per share from $0.25 per share. This is the 10th increase in a row. The stock is now a Dividend Contender.

Crown Castle International (CCI) announced a 10.8% increase to the regular quarterly dividend to $1.33 per share from $1.20 per share. This is the 7th increase in a row. The stock is a Dividend Challenger.

Middlesex Water Company (MSEX) raised the regular quarterly dividend 6.3% to $0.2725 per share from $0.2562 per share. This is the 48th straight annual increase. The stock is a Dividend Champion.

Coronavirus Dividend Cuts and Suspensions List

I updated my coronavirus dividend cuts and suspensions list this past Wednesday. The number of companies on the list has risen to 430. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic. The number of companies on the list continues to rise each week. 

No new companies were added to the list in the past week.

I included 4 companies that I had previously missed. The 4 companies that I previously missed were Summit Hotel Properties (INN), Noble Midstream Partners LP (NBLX), Orion Engineering Carbons S.A. OEC), and Banco Santander S.A. (SAN).

I added an article on The Cheesecake Factory (CAKE) Dividend Suspended this past week. The Cheesecake Factory is a very popular casual dining restaurant. However, it suspended the dividend in response to the coronavirus pandemic after brutal March and April sales. The company has recovered much of its sales, but the dividend has not yet been reinstated.

Market Indices

Dow Jones Industrial Averages (DJIA): 28,337 (-0.94%)

NASDAQ: 11,548 (-1.06%)

S&P 500: 3,466 (-0.51%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 34.9X and the Schiller P/E Ratio is at about 31.7X. These two metrics came down since last week due to market action. This is first down week after three up weeks. Note that the long-term mean of these two ratios are 15.8X and 16.7X, respectively. I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued.

S&P 500 PE Ratio

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Source: multpl.com

Shiller PE Ratio

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Source: multpl.com

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was flat at 27.6 reversing improving trends. The VIX still remains elevated relative to the long-term average. The long-term average is approximately 19 to 20.

The VIX rose almost near 30 this past week but came back down to where it started by weeks end. The number of new coronavirus infections are spiking in much of the U.S. and also the rest of the World. I believe that this is keeping the VIX elevated above its long-term average after almost approaching the average by end of August. The lack of any progress on the stimulus continues to be a negative for the market. The U.S. election is in the home stretch now. However, many voters have already voted early. There may be some legal wrangling over the election, which the market obviously would not like. But increasingly it looks like the outcome may not be significantly disputed.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

I could not update my discussion of the Fear & Greed Index value since it was not available when I wrote this article.

Junk Bond Demand, Put and Call Options, and Safe Haven Demand are all in Extreme Greed. Investors are not accepting much in the way of additional yield for junk bonds over investment grade corporates. Volume in put options is severely lagging volume in call options. Stock are outperforming bonds by 6.84% during the last 20 days. This is towards the higher end over the past two years. Market Momentum is signaling Greed as S&P 500 is more than 7% over its 125-day average. Stock Price Strength and Market Volatility are indicating Neutral. The number of stocks hitting their 52-week high is rising but still in the middle of the normal range. The VIX is elevated but near its 50-day moving average.

Source: CNN Business

Unemployment Numbers

The number of weekly new unemployment claims were down with last week at 787,000. This is down 55,000 from last week’s revised numbers. We are now below 800,000 for the first time since the pandemic. But for some perspective, one-year ago weekly unemployment claims were only about 213,000. Currently we are 4X the normal level. The seasonally adjusted insured unemployment rate was 5.7%. The weekly revised rate is now 6.4%

The ten states with the highest unemployment rates were Hawaii (14.9), California (11.5), Nevada (11.3), Georgia (9.3), Puerto Rico (9.3), Louisiana (8.8), District of Columbia (8.4), New Mexico (7.8), New York (7.7), and Illinois (7.6). 

Economic News

Housing continues to boom due to record low mortgage rates. The Commerce Department reported housing starts increasing by 1.9% in September to a seasonally adjusted 1.415 million units over August. This is greater than September 2019’s 1.274 million rate. Single-family housing starts in September were at a rate of 1.108 million, representing an 8.5% increase over the revised August figure of 1.021 million.

The US Index of Leading Economic Indicators rose .7% in September, mainly due to lower unemployment claims and increased housing permits, following a 1.4 percent increase in August and a 2.0 percent increase in July.  The slower pace of improvement suggests that the U.S. economy may losing steam as the federal stimulus effects fade. COVID-19 still remains a risk to the economy.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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