Dividend Investor Portfolio #17: Profitable Efficiency
1
Dear Investor,
Welcome to the 17th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
1
1
Market-Moving News: July 15, 2024
Stocks ended the week with gains, with the Dow Jones Industrial Average (DJIA) taking the rally’s lead with a weekly increase of 1.6%. On Friday, major indexes strongly rebounded from their previous day’s slump. The blue-chip DJIA and the S&P 500 (SPX) hit record highs before giving back some gains later in the session. The Nasdaq Composite (NDAQ) finished the week with a small gain, while the large-cap tech benchmark Nasdaq-100 (NDX) ended slightly down, having suffered a major sell-off on Thursday.
Federal Reserve Chair Jerome Powell’s testimony before Congress boosted investor sentiment, sparking an avalanche of rate-cut bets. Traders are now seeing increased odds of two interest rate decreases this year, with the first one arriving in September. The central bank’s head said that while labor market conditions remain strong, they have cooled “pretty significantly.” Powell also reiterated that the Fed doesn’t need to see inflation falling below 2% to begin easing policy, but rather steady progress towards this target to gain more confidence that rate cuts are justified.
Thursday’s CPI report, which showed the first month-on-month decline in inflation in four years, was greeted with another investor attempt at sector rotation. Large tech shares sold off as investors took profits, rotating to small caps and sectors expected to profit from monetary policy easing, such as materials, utilities, and real estate. Although the rotation attempt was short-lived, with the technology shares returning to draw buyers on Friday, the continued disinflation trend and increased odds of an imminent rate cut, coupled with rich tech stocks’ valuations, are expected to lead to further broadening of stock gains in the coming months.
1
1
This Week’s Quality Dividend Stock Idea
EOG Resources, Inc. (EOG) explores for, develops, produces, and markets crude oil, natural gas liquids (NLG), and natural gas. EOG is North America’s third-largest independent (non-integrated) crude oil and natural gas exploration and production company, focused on being among the highest return, lowest cost, and lowest emissions producers.
With a market cap of over $74 billion and annual revenues of $24.2 billion, EOG ranks #169 on the Fortune 500 list. The company, headquartered in Houston, TX, was founded in 1985 as Enron Oil & Gas Company and gained independence in 1999. While Enron holds a place in the pantheon of corporate corruption, EOG spun off from them prior to the exposure of major fraud in 2001.
Throughout the years, EOG performed many acquisitions, divestitures, strategic investments, partnerships, and asset swaps. These helped it acquire a vast multi-basin portfolio, positioned across all major oil and gas-producing areas in the U.S.
1
Diverse Profitable Operations
The company operates primarily in producing basins in the United States where it focuses mostly on oil, with gas responsible for about 30% of total production. However, natural gas is projected to see a strong surge in demand, as proliferating data centers and industrial plants require ever-rising amounts of energy while at the same time coal-fired power plants are being retired.
EOG has a strong presence in all of the major and the most productive U.S. shale basins, such as the Permian, Anadarko, Barnett Shale, Bakken, DJ, Appalachian, Eagle Ford (discovered by EOG and ConocoPhillips in 2010), and others.
EOG Resources is a leading player in the Permian Basin with over 660K barrels of oil equivalent per day, capitalizing on its extensive resource acreage in the region. The Permian Basin is especially important, as it is America’s leading oil region. It possesses unparalleled production growth potential as well as the best production efficiency in the U.S. According to the Energy Information Administration (EIA), the region is expected to continue leading U.S. crude oil production, supplying nearly half of total domestic production.
EOG also operates in the rich Columbus basin offshore of Trinidad and Tobago. In addition, a subsidiary of EOG holds a 100% interest in an exploration permit located offshore Western Australia, intending to begin drilling exploration wells in 2024-2026.
1
The Winning Early-Mover Strategy
The U.S. oil industry has been undergoing a rapid consolidation process, as large producers buy out smaller rivals in a race for scale. In the past five years alone, the number of publicly traded oil and gas companies fell by almost 40%. Against that landscape, EOG has largely held back against the peer pressure to pursue giant headline-grabbing and debt-increasing acquisitions akin to those performed by its peers including Exxon, Chevron, ConocoPhillips, and Occidental Petroleum.
After acquiring significant acreage in the most productive U.S. basins at the dawn of the shale boom, it continues to play the “early mover” card, preferring to grow organically and concentrate on previously unknown or overlooked hydrocarbon plays at low prices. This strategy has led to the discovery of a new premium play, the Ohio Utica Combo, as well as the advancement of operations and acreage accumulation in the emerging plays, the South Texas Dorado and Southern Powder River Basin.
Besides the accumulation of vast acreage with strong production potential without the need to take on heavy debt loads, following this early-mover strategy has allowed EOG to optimize its exploration, development, and total operating costs, improving margins. The company prioritizes new projects where a 30% return on capital employed (ROCE) can be reached, even with oil prices at $40 per barrel. As a result, EOG has one of the lowest break-even prices among the U.S. shale oil producers, capable of generating double-digit ROCE at above $44 per barrel (the current market price is about $81; the 10-year average is $65).
1
Stellar Finances Support Dividends and Buybacks
EOG checks all the boxes on financial health, capital efficiency, and profitability metrics. In stark contrast with most energy producers, the company has more cash than its total debt. Its debt-to-equity ratio stands at an industry-low 13%, with the debt repayments covered by operating cash flows hundreds of times over.
The company takes pride in its robust ROE, ROA, and ROIC metrics, which come in the top 10% of its industry. EOG’s operating, FCF, and net profit margins are also considerably higher than average for its peers, indicating outstanding operational efficiency and profitability.
EOG Resources pays strong attention to its cash generation, targeting a total free cash flow increase of $22 billion in 2024-2026. This target looks conservative given that in Q1 2024 alone the company generated $5.1 billion in free cash. This is an important figure for EOG shareholders, as the company intends to distribute at least 70% of its FCF through dividend payments and buybacks.
EOG performs opportunistic share repurchases. It bought back $971 million of its stock during 2023 and $750 million during the first quarter of this year. At the end of Q1, the company had $3.3 billion remaining under its current repurchase authorization.
Dividend payments are EOG’s stated number one capital allocation priority. The company has been paying dividends over the past 26 years, never suspending or reducing payout despite some difficult periods it encountered through those years, such as the Global Financial Crisis, the oil price crash of 2014, and the pandemic.
While the company’s dividend-per-share grew at a CAGR of 23% in the past decade, in the last five years it surged at a CAGR of 33.4%. The company began steadily raising the payout each year by a notable percentage only in 2018, once management was sufficiently confident that its strategy was working out and would continue to support operational excellence.
After the latest dividend hike (it was raised by 10% in January), EOG’s current dividend yield stands at 3.94%, higher than the average for the Energy sector. Analysts expect that the dividend will continue rising at a CAGR of ~30% over the next several years, with this outlook supported by EOG’s production growth, efficient operations, vast reserves, and commitment to shareholder returns.
1
High-Quality Value Play Opportunity
As with all producers, EOG Resources’ revenues display high dependence on oil and gas price trends, as well as on domestic and international developments affecting prices or those expected to affect them in the future. Oil prices surged after the COVID-19 restrictions were lifted but tumbled by over 30% since their latest peak in June 2022. Despite these developments, EOG’s revenues grew at a CAGR of 31% in the past three years (post-pandemic), while its earnings-per-share surged at a CAGR of 390%.
This year, oil prices have increased by ~15% despite macroeconomic headwinds and OPEC’s decision to phase out some of its production cuts, lifted by strengthening global energy demand. Looking forward, EOG’s vast reserves, with operations highly profitable even with lower oil prices, support the outlook for further strong earnings growth.
In addition, thanks to its Dorado gas project, EOG expects to capitalize on accelerating exports of LNG, driven by demand for cleaner energy sources. All in all, total energy demand is expected to continue rising rapidly, spurred by data center proliferation, electric vehicles, rising temperatures, the U.S. industrial renaissance, and other factors.
EOG’s shares have risen by 8.5% in the past year, displaying median performance among comparable peers. Wall Street analysts attach different price targets to the stock for the next 12 months, implying 14%-22% upside.
Meanwhile, the stock trades at very attractive valuations, carrying about a 15% discount to the Energy sector’s average P/E ratio and coming in the middle of the valuation range for U.S. independent oil and gas producers.
1
Investing Takeaway
EOG Resources is a very profitable, financially robust company with highly efficient operations, vast reserves, and strong alignment with shareholder interests. We view its current low valuation as an opportunity for a high-quality value bet on the multiyear cycle of rising demand for energy on the back of technological advancement and industrial reshoring. All together, these factors make EOG an attractive addition to long-term income portfolios.
1
1
Dividend Investor Portfolio
1
Portfolio News
¤ JP Morgan (JPM) reported its Q2 2024 results on July 12th. The world’s largest bank posted record quarterly profit, with the adjusted EPS rising by almost 30% year-on-year. Earnings from the investment banking and equities trading divisions smashed expectations; quarterly income was also boosted by a $7.9 billion net gain related to Visa stock holdings. However, a smaller-than-expected rise in net interest income and an increase in loan-loss provisions dampened investor enthusiasm.
¤ BlackRock (BLK) will report its Q2 2024 results later today.
1
Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
1
Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.74% | 9.26% | $3,762.20 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.18% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 3.23% | $9.00 |
| BlackRock (BLK) | Sep 06, 2024 | Sep 23, 2024 | 2.55% | $20.40 |
| Edison International (EIX) | Jul 08, 2024 | Jul 31, 2024 | 4.29% | $3.12 |
| JPMorgan Chase (JPM) | Jul 05, 2024 | Jul 31, 2024 | 2.20% | $4.60 |
| Kroger (KR) | Aug 15, 2024 | Sep 01, 2024 | 2.32% | $1.28 |
| LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.07% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 5.82% | $5.20 |
| Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 2.03% | $3.40 |
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
