The one thing oil companies stick to - November 29, 2015

The one thing oil companies stick to

Oil companies (and oil dependent countries) have seen better times: thanks to the continuously falling crude prices they announced layoffs and they are postponing important investments. These may be hard times for them, but one thing doesn’t seem to change: they are still paying big amount of dividend to the stockholders. They have a good reason for that.

Something has changed

It's common knowledge that commodities i.e. oil had its golden era in the first years of the 2000s. Prices were high, energy and oil sector had giant earnings, and they spent fortunes on investment.

But something has changed in 2008-2009: the financial crisis came, and even energy sector paid the price. They recovered from the first shock, but the prices never again raised to the pre-2008 level. After 2011 oil and other commodity prices started to decline again, and we still see the effects of that. The prices are around $40-50, while they were above $100 just some time ago. They may hike again, but probably will not reach heights they had before. This is the main reason of the cutbacks of workforce and investments.

Something will never change

We see how prices fell, profits declined, but all these things weren't enough to make dividends lower. On the contrary: ExxonMobil, the largest of the world's supermajors, just announced that it will raise its payments to stockholders. They are doing this for 33 years in a row.

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ExxonMobil is not the only one to keep dividend payments high even if the earnings started to decline. BP, Statoil, ConocoPhillips and Occidental Petroleum is doing exactly the same: they are serving the shareholders with decent dividends. To sum all this up: oil companies are cutting expenses, but still paying dividends. ExxonMobil pays $12 billion, Chevron pays $8,1 billion altogether this year.

These breathtaking numbers are rather important since most investors are buying these stocks because they believe in their high and calculable returns. This is an important combination for investors. Oil giants will not grow like lucky IT startups, but there is a lot less risk involved here, and they will always serve decent dividends. Both companies and investors know this, and that’s why oil companies can’t go back on the high earnings: if they cut dividends, investors may leave them, and that would result in the falling of stock prices.

Who is this good for?

To put it simply: every participant. Oil companies can sell their stocks while stockholders can expect the dividends. Even professional investors and financial service providers can benefit from oil companies, since they are trustworthy investments for decades. Therefore they can be added to portfolios for better diversification, greater stability and guaranteed earnings. These are the basics of good risk management.

Disclaimer: Innovative Securities offers Profit Max which has a highly diversified, professionally assembled portfolio with stocks included from high dividends paying companies. In the last 5 years Profit Max performed better than the S&P500 Index.