When the stock market discussion turns to Big Oil, most of the attention is typically paid to U.S.-based giants ExxonMobil and Chevron. Indeed, investors are likely enticed by their 3%-4% dividend yields. But while ExxonMobil and Chevron are solid companies, dividend investors hoping to generate as much income as possible can do better.
Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B), Total (NYSE:TOT), and BP (NYSE:BP) are three Big Oil companies based in Europe that reward their investors with industry-leading dividend yields. Each of these stocks pays at least a 5% yield, with BP's 6% yield leading the pack.
As a result, investors might want to take a closer look at these three stocks.
Don't be afraid to leave the comforts of home
International stocks can often fly under the radar. But those 5%-6% yields provide Shell, BP, and Total with a meaningful edge over their American competitors. A 2-percentage-point difference might not seem like a big deal, but it can add up. For example, an investor who makes a $10,000 investment at a 4% yield will earn $400 in annual income. By comparison, the same investment in a stock that yields 5% will earn 25% more income: $500 per year.
The European Big Oil companies are more willing to distribute a greater percentage of their cash flow as a dividend, which explains why they yield more than their U.S. counterparts. Fortunately, it seems Shell, BP, and Total can afford to pay their generous dividends, even in today's poor operating environment. The approximately 50% decline in oil prices has obviously had an effect industrywide, but these companies' integrated structures mean they aren't as vulnerable as one might assume.
A big advantage for Big Oil
Earnings reports over the past year have been ugly, which is no surprise. But the dividends have kept rolling in. These European Big Oil companies are being helped by downstream refining, where spreads tend to widen as oil prices decline, leading to improved profitability.
Royal Dutch Shell's net profit fell 8% to $15 billion in 2014, which is actually impressive considering the steep collapse in oil prices. Shell's earnings were boosted by its large downstream business, which comprises 27% of the company's total profit. Refining performance improved significantly, and its downstream earnings soared 40% last year to $6.2 billion. This allowed Shell to generate $25 billion in cash flow for the full year. This was more than enough to cover its capital return program. Shell returned $15 billion to investors through a combination of dividends and share buybacks.
Total's downstream business made up 17% of its total adjusted profit in 2014. Earnings in the downstream and chemicals segment jumped 34% last year, which significantly offset the 16% decline in profit on the upstream business. This helped Total hold up surprisingly well in 204. The company generated $12.8 billion in adjusted profit, or $5.63 per share, a decline of 11% from the previous year.
BP lost $4.4 billion last quarter, due to the crash in oil prices. But the company still generated $32.8 billion in operating cash flow in 2014, up from $21.1 billion in 2013, thanks in part to a 22% increase in downstream profit. BP was also boosted by a higher than anticipated $2.1 billion profit contribution from its 19% stake in Russian oil company Rosneft.
Above-average dividends for the taking
It's a tough time to be in the oil business, but not all energy companies are created equal. The integrated majors have a key advantage -- their balanced businesses. The integrated model provides valuable insulation against collapsing oil prices. Most important, it allows Big Oil companies to continue paying their juicy dividend yields.
The European members of Big Oil do their investors even better than their U.S. peers, with 5%-6% dividend yields, which are well-supported with underlying cash flow.