The energy industry is decidedly out of favor today, even though the world still needs the oil and natural gas that it creates. That presents an opportunity for investors with a contrarian bent. But buying any old energy stock isn't the way to go -- you want to own financially strong names that can handle a little near-term adversity. Here are three companies with big dividend yields that should muddle through this rough patch with relative ease.
1. The energy giant
With a yield of roughly 5%, international energy major ExxonMobil (XOM 1.50%) is one of the largest and most diversified oil and gas companies in the world. Operations that span from the drill bit (upstream) to the gas pump (downstream) help provide some stability to the company's results over time, since low oil prices result in reduced costs for the company's refining and chemicals operations. Having assets spread across the globe, meanwhile, allows the company to tap into economic growth around the world.
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Exxon, however, isn't the only company that can claim these traits. What helps set Exxon apart from many of its peers is its conservative approach. One of the best examples of this is the oil giant's rock-solid balance sheet. Financial debt to equity stands at just about 0.15 times, which is well below the levels of most of the energy majors (Chevron, at about the same level, is the only competitor that's in the same ballpark, leverage-wise). In fact, that figure is low for any industry. Management's conservative approach is one of the reasons why Exxon has been able to increase its dividend every year for 36 years and counting -- a record that no peer can match.
To be fair, Exxon is spending a lot of money right now on drilling for new oil, and that's likely to mean more debt over the near term. But management believes it has an incredibly strong set of investment opportunities right now, and early progress on its capital investment plans has been good. If you can think long-term with a company that thinks long-term, then Exxon could be a great high-yield addition to your portfolio today.
2. Moving it all around
Despite all of its diversification, Exxon's top- and bottom-lines will always be highly dependent on energy prices. That might turn more conservative types off. That's where 6.2%-yielding Enterprise Products Partners (EPD -0.17%) comes in. This master limited partnership operates in the midstream space, helping to move energy products from where they are drilled to where they get used. The key, however, is that roughly 85% of its gross operating margin is fee-based, meaning that it gets paid for the use of its assets. The prices of the products passing through its system of pipes, storage, transportation, and processing facilities isn't all that important -- demand for energy is the key factor to watch, and that remains fairly strong.
Meanwhile, Enterprise is one of the most conservative names in the midstream space. The partnership's debt to EBITDA ratio is around 3.4 times, near the low end of its peer group. Enterprise also covered its distribution by a massive 1.7 times through the first nine months of 2019. For reference, 1.2 times is considered strong coverage. Put simply, Enterprise is a rock-solid partnership, which helps explain how it has managed to increase its distribution annually for 22 consecutive years.
Looking to the future, Enterprise is currently spending around $9 billion on capital projects. This is a lot of money, but hardly unusual. Enterprise has successfully spent nearly $70 billion building its business (via acquisitions and construction projects) since its IPO in 1998. There's no reason to doubt that it will continue to execute well at this point. And as it expands its portfolio of revenue-generating assets, it expands its ability to pay distributions. Enterprise is a strong option for conservative income investors.
3. Surviving the ups and downs
The last name here, Helmerich & Payne (HP 0.73%), is for investors that can handle uncertainty. The company builds, leases, and operates drilling rigs for companies like Exxon. Demand for drilling service providers tends to go up and down with energy prices, since low oil prices often lead drillers to pull back on spending. That, in turn, reduces demand for the services Helmerich & Payne provides. Right now demand is weak and investors are concerned that Helmerich & Payne's dividend won't hold up, which is why it yields a hefty 6.3% today.
That said, the company has increased its dividend annually for an incredible 46 years and counting. There have been a lot of oil bull and bear markets over that span, and the dividend has survived them all. A big piece of that is, as should come as no surprise by now, a solid financial foundation. Helmerich & Payne's financial debt to equity ratio is just about 0.10 times -- low for any company in any industry. The company's closest peer on this metric, meanwhile, comes in at around 0.5 times.
HP Financial Debt to Equity (Quarterly) data by YCharts
As for the safety of the dividend, some investors will likely complain that earnings aren't covering the dividend today. That's true -- the company's payout ratio is terrible. But dividends don't come from earnings, they come from cash flow, and the cash dividend payout ratio (which looks at dividends in relation to free cash flow) is roughly 80%, which is pretty normal for Helmerich & Payne. Yes, times are tough right now, but this financially strong drilling service provider has the financial strength to muddle through.
Meanwhile, it has one of the most advanced drilling fleets in the U.S. onshore market. This fact has allowed Helmerich & Payne to gain over five percentage points of market share since late 2014 (when oil prices were much higher) despite relatively weak energy prices. Although income investors will need to be able to stomach the ups and downs of the oil market here, Helmerich & Payne appears built to survive and thrive in any environment.
Big yields, various risk profiles
The one theme that holds for Exxon, Enterprise, and Helmerich & Payne is that each has a strong financial foundation. Those foundations are what underpin the income that each throws off to investors. All three should be able to survive the current weak energy market and come out the other side stronger competitors.
That said, Enterprise's fee-based business model should be the most attractive to conservative investors. Exxon's large and diversified business would be appropriate for investors willing to take on moderate risk in search of yield. And Helmerich & Payne is most appropriate for investors with strong constitutions, noting that its price would likely advance rapidly should oil prices (and demand for its services) rebound.
