While crude prices are hovering around their start-of-the-year levels and many independents are still bleeding cash, the fundamentals of three energy companies -- ExxonMobil (NYSE: XOM), Spectra Energy (NYSE: SE), and Phillips 66 (NYSE: PSX) -- are strong, and each is likely to raise its dividend in 2016. Let's take a closer look at the three companies and analyze why each company is suited for a dividend growth portfolio.
While supermajor ConocoPhillips (NYSE: COP) slashed its dividend in February, ExxonMobil isn't likely to. ExxonMobil raised its dividend by 6.7% in 2015 and has the best balance sheet in the sector, with the oil industry's only "AAA" credit rating. The company has enormous flexibility. To raise the bridge liquidity to fund the dividend, ExxonMobil can sell non-core assets, cut costs by laying off part of its workforce, halt share buybacks, add debt, or cut its capital expenditure budget further.
ExxonMobil's downstream and chemical units can also do wonders for it, as the two units made $2.36 billion in profits last quarter, compared with ExxonMobil's dividend cost of $3.03 billion a quarter. Given the company's balance sheet strength and its enormous flexibility, ExxonMobil can afford to raise its dividend by 1 cent this year and keep its Dividend Aristocrat status.
Unlike Kinder Morgan (NYSE: KMI), which cut its dividend by 75% last December, Spectra Energy will raise its dividend this year. The company, in fact, announced plans to raise its annual distribution every year by $0.14 per share through 2018. Spectra Energy can do so because the company has stable assets -- 90% of its revenue from its natural gas transmission portfolio is from fixed-fee long-term contracts with customers with high credit ratings.
The company also has $8 billion of stable contractually secured projects in its backlog, much of which has low-volume risk. Because of its stable and low-risk contracts, Spectra Energy had a dividend distribution of 1.3 for 2015, or 7% better than management expectations, and expects to have dividend distribution coverage of 1.2 for 2016, 1.3 for 2017 and 1.1 for 2018. With the future dividend raises, a current quarterly dividend of $0.41 per quarter, and a yield of 5.67%, Spectra Energy is one of the safest and best dividend plays in the midstream sector.
Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has been a big buyer of Phillips 66. According to SEC filings, Berkshire Hathaway established a position in oil refiner Phillips 66 in early 2015 and gradually built its position up from that point. In early February 2015, Buffett added another 1.69 million shares, giving Berkshire a total of 74 million shares, or around 14% of Phillips 66's float.
Unlike upstream companies, oil refiners such as Phillips 66 don't need high crude prices to do well. Refiners benefit from the crack spread, or the price difference between crude oil and the petroleum products extracted from crude. Because demand for petroleum products has been robust as a result of the strong U.S. economy, and crude prices have been weak because of oversupply, the crack spread has been wide, and Phillips 66 has been enormously profitable.
For 2015, the refiner reported earnings of $4.2 billion and returned $1.19 billion of that amount through dividends. Phillips 66 also has a midstream unit that will benefit if crude prices rise. Given the company's low payout ratio of 24.6% and the strong outlook for refiners, Phillips 66 will probably raise its dividend in 2016, too.
Given that the three companies are doing well when times are bad and crude prices are low, Phillips 66, Spectra Energy, and ExxonMobil will do even better when times are good and volume production increases and upstream profits spike. Phillips 66, Spectra Energy, and ExxonMobil's stability make them low-risk stocks while their relatively high dividend yields make them good purchases.
TMFJay22 has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway, Kinder Morgan, and Spectra Energy. The Motley Fool owns shares of ExxonMobil and has the following options: short June 2016 $12 puts on Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.