There has been some drama concerning the ability of big name holdings in exchange traded funds like the Energy Select Sector SPDR (NYSEArca: XLE) to continue paying and/or raising dividends as oil prices continue to slide.
Investors’ concern has been warranted because the energy sector is home to the most negative dividend actions (reductions and suspensions) of all S&P 500 sectors this year. Still, many of the marquee stocks held by XLE and rival energy ETFs have boosted payouts this year, if only on a token basis, and some analysts believe the sector’s dividends are “mostly safe.”
“However – and this is the key part – this does not mean that dividends will be cut. The reason is this: all of the companies that have a healthy balance sheet today should still have a healthy balance sheet at the end of 2016, even if they maintain the current dividend. In other words, keeping the dividend will not be enough to turn a healthy balance sheet into an overlevered one; and, similarly, cutting (or suspending) the dividend will not turn an overlevered balance sheet into a healthy one,” said Raymond James in a note posted by Ben Levisohn of Barron’s.
The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have historically exhibited a long standing of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]
Exxon Mobil (NYSE: XOM), Kinder Morgan (NYSE: KMI), Schlumberger (NYSE: SLB), ConocoPhillips (NYSE: COP) and Occidental Petroleum (NYSE: OXY), all top 10 holdings in XLE, have boosted dividends this year. The outlier is Dow component Chevron (NYSE: CVX). Chevron, the second-largest U.S. oil company behind Exxon and XLE’s second-largest holding, has already reduced capital spending and suspended a share buyback program, but its multi-decade dividend increase is in jeopardy.
California-based Chevron usually raises its dividend in April, but that did not happen this year. Chevron is a dividend aristocrat by way of a payout increase streak spanning 27 years.
Energy Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.