In 2012 ConocoPhillips (COP 7.46%) made a huge change, spinning off its non-drilling operations to become a pure play upstream oil company. ConocoPhilips now presents quite the contrast to global energy giant ExxonMobil (XOM 5.28%), and the divide between these two companies is huge when it comes to dividend investing as well. Here's why Exxon is the better dividend stock.
1. The business matters
On May 1, 2012, ConocoPhillips completed the spin-off of its midstream and downstream operations into a company called Phillips 66. ConocoPhillips basically went all in on oil and natural gas drilling. At the time oil was trading at historically high prices, and the decision seemed to make a lot of sense, assuming oil prices remained high. They didn't, falling dramatically in mid-2014. That's par for the course in the highly volatile oil and natural gas space -- but without its pipeline and refining operations to soften the hit, ConocoPhillips and its shareholders were fully exposed to the pain of falling oil prices.
Exxon, on the other hand, is a diversified energy giant. Not only does it have broad exposure to drilling, but it also owns massive midstream and downstream businesses. Downstream operations often benefit from low energy prices because oil and natural gas are key inputs in these businesses. The benefit is not enough to fully offset the hit from a steep oil price decline, but it evens out the ups and downs. This isn't rocket science, just the inherent benefits of diversification.
If you are looking to bet on the direction of oil prices, ConocoPhillips is a great choice. If you are looking for a buy-and-hold energy stock that will let you sleep well at night, Exxon is a better option.
2. The dividend and the downturn
The oil price decline that started in mid-2014 was huge, with oil falling from over $100 per barrel down to around the $30 level. It should come as no surprise that ConocoPhillips and Exxon didn't do so well. Exxon's earnings dropped from $7.60 per share in 2014 to a low of $1.88 per share in 2016 before rebounding. ConocoPhillips' earnings plummeted from $5.51 per share in 2014 to a loss of $3.58 per share in 2015 before starting to turn around. However, the red ink continued for two more years, with losses of $2.91 per share in 2016 and $0.70 per share in 2017. It wasn't until 2018 that the company's bottom line was back in the black.
To be fair, there are one-time items in those figures. So ConocoPhillips' actual operating performance wasn't as bad as the red ink would have you believe. But there is one number that sticks out, and it was every bit as bad as it looked -- in 2016 ConocoPhillips cut its dividend by 66%. With earnings tied entirely to the price of oil, it pretty much had no choice in the matter during such a deep oil downturn. Exxon, by comparison, continued to increase its dividend using the strength of its more conservative, diversified business model to keep rewarding investors even during the downturn. Its streak of annual increases is now up to 37 years.
If you are an income investor looking to live off the dividends your portfolio generates, there's really no comparison between these two companies. Diversification and consistency win.
3. But things have changed...
Sticking with slow and boring, however, can be hard when times are good. For example, ConocoPhillips started increasing its dividend again in 2017, with 2019 the third consecutive year with an increase. After resetting, ConocoPhillips could finally be on stronger ground. The stock price, meanwhile, is up around 50% since oil prices bottomed out in early 2016. Exxon's stock is down around 6% over the same span.
Even looking over the entire span since the spin-off, ConocoPhillips comes out on top. Its shares are up 6% since the 2012 break up, while Exxon's are down 16%. Brent crude, an oil industry benchmark, is off by around 42%. When you add in dividends, looking at total return instead of just stock prices, ConocoPhillips still leads with a gain of 35%. Exxon, however, shifts from a loss to a gain of 8% -- not exactly impressive, but it shows the power of dividends. On top of these stats, since ConocoPhillips started raising its disbursement again, the dividend has grown more than Exxon's.
Before getting too lost in the good numbers, however, take a look at a bad one: Between June 2014 and mid-January 2016 (about when oil prices started to recover), Exxon's stock declined by around 25%, while ConocoPhillips' stock dropped 50% (and the oil-focused company ended up cutting its dividend). Exaggerated price movements are really the norm for ConocoPhillips, since it is tied directly to often-volatile oil prices. Exxon tends to muddle along, spitting out a slowly rising quarterly dividend.
ConocoPhillips stock has been more rewarding overall, but that could change as quickly as oil prices. And don't forget the very real risk of a dividend cut in the event of a notable oil price decline. Slow and steady Exxon isn't exciting, but history shows that your quarterly dividend check is safer.
What are you looking for?
ConocoPhillips is actually a pretty well-run oil company, and definitely worth a close look if that's what you want to own. However, Exxon is a better dividend stock if you are looking to live off of the income your portfolio generates. Simply put, diversification and consistency make a huge difference when it comes to dividend stocks.
And with all of that out of the way, it's time to note that Exxon's 4.7% dividend yield is more than twice as high as the 2% you'll get from ConocoPhillips. Some dividend investors would have probably started with the yield, but in this case it isn't the most important piece of the puzzle. In fact, before ConocoPhillips cut its dividend in 2016 the yield was around 9%. Exxon yielded less than half that amount. The problem, of course, is that ConocoPhillips' fat yield proved short-lived because of the very different business approach it takes.