By Brian Nelson, CFA
I believe one of the strongest areas at Valuentum is our quantitative work, not only with respect to enterprise free cash flow valuation, but also with respect to assessing dividend health. For those that have not had a chance to evaluate the efficacy of the Dividend Cushion ratio, “,” it is well worth a quick read. For example, if you are a financial advisor or individual investor and you were holding ConocoPhillips (COP) for income purposes, then you are not taking advantage of the depth of our forward-looking quantitative research.
Today, February 4, ConocoPhillips cut its dividend payout ~66%, to $0.25 on a quarterly basis, now implying a forward yield of ~2.5%. ConocoPhillips registered a -1 (negative 1) on the Dividend Cushion ratio prior to its dividend cut, but the ratio had been poor for some time. In ConocoPhillips dividend report, released November 27, “Dividend Report (pdf)”, we said the following: “We’re going to call it how it is: ConocoPhillips’ dividend is not safe. Though the company continues to slash capital spending, the collapse in energy resource pricing is hurting operating performance in a big way. Having spun off its downstream assets, ConocoPhillips now more than ever is exposed to volatile commodity prices. For a dollar change in Brent crude, net income is impacted by nearly $100 million. Though ConocoPhillips may increase the dividend in the near term, it will be some time before the company closes the gap to free cash flow neutrality. A prolonged period of low energy resource pricing could result in a dividend cut. A negative Dividend Cushion ratio is a clear warning sign.”
If you are an income investor and you are not taking advantage of the information contained in the Dividend Cushion ratio, you are not getting all that you can from your membership. We plan to update our 16-page valuation report and dividend report on ConocoPhillips soon, but that “ship has sailed.” We hope you avoided this bombshell. Add yet another company to the growing list of dividends the Dividend Cushion ratio has warned about in advance. Please use our tools to your advantage. Access to the Dividend Cushion ratio alone is worth the membership price, if it saves you from just one catastrophe, and the Dividend Cushion ratio has saved income investors from dozens in the short time of its existence.
Please take the time to get familiar with our quantitative work.