Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.
I should make it clear that I’m not recommending any of the stocks I write about. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.
For previous articles about dividend paying stocks, click on one of the following: CenturyTel (CTL) here.
Eni SpA (E) is an Italian-based company operating in the oil and gas, electricity generation and sale, petrochemicals and oilfield services construction and engineering industries. The Company operates in five segments: Gas & Power, for the supply, transport, re-gasification, distribution and sale of natural gas and for the generation and sale of electricity; Exploration & Production, for the exploration and production of hydrocarbon and for the storage of natural gas; Refining & Marketing for the refining and marketing of petroleum products in Italy and Europe; Engineering & Construction, for the engineering, construction and drilling services, both offshore and onshore for the oil and gas industry, and Petrochemicals for the production and marketing of petrochemical products such as olefins, aromatics and intermediates, styrene, elastomers and polyethylene. The Company is active in more than 77 countries.
Eni has an $85 billion market capitalization (similar in size to ConocoPhillips – COP) and is currently yielding 5.66% in dividends. ConocoPhillips yields 3.86%. Last year the company’s net income fell over 50% but still managed to earn just under $6 billion. Cash generated from operations was however $14 billion which gives an idea of how strong the business is at generating cash (although this was also down over 50% from 2008).
The drop in earnings explains the relatively high PE ratio for a low growth business at 14.77 times. This is however below the industry average of 16 times. The price to sales ratio is also particularly low at 0.77 times which is somewhat unusual in the sector (ExxonMobil, PetroChina and Petrobras are all above 1). Cash flows are also cheap at about 4.6 times.
Despite the earnings drop in 2009 the dividend dropped by only 22% which shows management’s belief that earnings will rebound in 2010. The payout ratio slipped from 50% in 2008 to 83% in 2009, while cash on hand is considerably down as compared to the last five years. The company also generated less cash from operations that it spent on capital expenditures which is also a sign of which investors need to be wary.
The outlook for the energy sector is strong and I would hazard a guess that earnings will return to higher levels for 2010, although I make no promises! The high profits of 2007 are probably a thing of the past but the business should make comfortably enough money to at least maintain the dividend at current levels, which would present a 5.66% yield.
Disclosure: None
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