Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
For a second straight week we're sticking with the theme of conglomerates and focusing on an international energy and chemicals juggernaut: Sasol (NYSE:SSL).
Not your typical oil and gas company
Rather than focusing on drilling for oil, Sasol has vast deposits of coal and natural gas that it retrieves from the earth and, through a process known as coal-to-liquid technology (CTL), or gas-to-liquid technology (GTL), transforms these fuel sources into liquid fuels such as diesel.
Very few exploration and production companies have even bothered with this elusive technology, because it's expensive to implement. Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B), for instance, spent $19 billion on its GTL plant in Qatar and was over budget by a factor of three, according to The New York Times. For GTL technology to be profitable, natural gas prices have to remain low in relation to oil, diesel, and jet fuel over the long term.
Other factors that you have to consider when investing in an international conglomerate like Sasol are that political embargoes and unfavorable governments can play into its bottom-line results. Sanctions the U.S. and the European Union imposed against Iran, for example, coerced Sasol to stop purchasing oil from Iran roughly one year ago and enticed the sale of its Iranian-owned petrochemical plant.
The global economy is another factor worth watching, as polymers produced from its chemicals operations largely depend on a growing economy to thrive.
Why Sasol makes sense as an investment
You're probably wondering why, with all of Sasol's potential political problems and the high costs of GTL technology, I'd even suggest buying into the company. The answer revolves around creating an energy-independent United States.
Working in Sasol's favor are gigantic shale formation finds in North America that may indeed keep natural gas prices capped for years to come. President Obama has made it clear that he'll use any means necessary to reduce America's reliance on foreign oil, and Sasol is going to become an integral part of that solution by the end of the decade. With the enticement of more than $2 billion in tax credits and other incentives, as well as an abundant fuel source just hundreds of miles away, Sasol agreed to build what will amount to an $11 billion to $14 billion GTL plant, and a $5 billion to $7 billion chemical plant, in Louisiana. When production commences in 2018, the plant will be able to produce 96,000 barrels of fuel per day. Unsurprisingly, Royal Dutch Shell has also considered building a GTL terminal in the Gulf of Mexico.
Sasol's GTL expansion isn't just limited to the U.S., either, with two additional GTL plants currently being built in collaboration with other large integrated oil companies. One plant is being built in Uzbekistan with the help of Malaysian oil company Petronas, while in Nigeria, Sasol and Chevron (NYSE:CVX) have teamed up to build a GTL plant. Originally, Sasol had planned joint GTL venture projects -- one in Louisiana and one in Canada with Talisman Energy, which it signed on as a partner in 2010. However, Talisman backed out last year, and Sasol made the wise decision to focus on the natural gas-rich U.S., which has easy terminal access along the Gulf Coast, while putting its Canadian venture on hold.
In addition to high-margin liquid fuels, you get a chemicals business that generates cash flow that's either consistent or, in some cases, better than the growth rate of the global economy. That's a result of Sasol's exposure to faster-growing emerging-market countries -- something that, as I mentioned earlier, can be both a boon and a liability.
Show me the money
But when push comes to shove, what I really love about Sasol is its generous dividend policy, which rewards shareholders willing to take on a little political risk. Sasol's pays its dividend only semiannually and is determined on a rolling basis, so it can be a little difficult trying to compare previous years against one another. What I can tell you is there's a clear indication that Sasol cares about its shareholders based on these payouts:
There's not a perfect uptrend, as energy prices collapsed during the great recession, hurting demand for Sasol's products and putting pressure on its payout. But overall, this equates to average dividend growth of 18% over the past decade! Best of all, its payout ratio is just 43% based on projected profits in 2013, which leads me to believe this trend of big dividend growth will continue.
Sometimes being different is a good thing. Sasol's innovative technology requires a little more commodity price cooperation than traditional oil and gas drilling, but it's one of the many pieces of the puzzle to getting the U.S. on its path to energy independence. Looking abroad, Sasol's involvement in emerging markets fuels its rapid growth, while its chemical business supplies relatively steady cash flow to aid in its expansionary efforts. With a current yield of 5.2% based on last year's payout, it offers a higher payout than either ExxonMobil or Chevron domestically, and at a forward P/E of just 8, it's as comparatively cheap as any major oil and gas company in the world.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services have recommended buying shares of Sasol and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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