Company Description: Occidental Petroleum Corporation is one of the largest oil and gas companies in the U.S., OXY has global exploration and production operations. Its subsidiary, OxyChem, is one of the largest U.S. merchant marketers of chlorine and caustic soda.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
OXY is trading at a discount to 1.) and 3.) above. The stock is trading at a 13.4% discount to its calculated fair value of $110.97. OXY earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
OXY earned one Star in this section for 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1975 and has increased its dividend payments for 12 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
OXY earned a Star in this section for its NPV MMA Diff. of the $3,690. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as OXY has. If OXY grows its dividend at 12.5% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.31%. OXY earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Memberships and Peers: OXY is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: E. I. du Pont de Nemours and Company (DD) with a 2.7% yield, Exxon Mobil Corporation (XOM) with a 2.7% yield and Royal Dutch Shell plc (RDS.A) with a 4.7% yield.
Conclusion: OXY earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks OXY as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $115.94 before OXY's NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 2.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 10.8%. This dividend growth rate is significantly lower than the 12.5% used in this analysis, thus providing a margin of safety. OXY has a risk rating of 2.00 which classifies it as a Medium risk stock.
OXY possesses a large and geographically diverse reserve base. The company built its business around finding and acquiring proven properties to drive its future production growth. It should benefit from higher production and oil prices, with domestic growth being driven by reserve prospects in California and the Permian Basin. International growth could come from Bahrain, Oman, Libya and Iraq.
The company continues its steady share repurchase activities, growth projects and strategic asset divestment. During first quarter 2014, Occidental Petroleum repurchased around 10.5 million shares reducing its cost of equity. The company is enjoying cost savings from drilling efficiencies. Its debt to total capital is at an enviable 14% and the stock is trading at a discount to its $110.97 calculated fair value. As such, I will continue to look for opportunities to add to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in OXY (0.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: [OXY] [DD] [XOM] [RDS.A]