Oil prices are scuffling and the energy sector is mired in a slump, but some equity-based ETFs in this category are becoming decent income ideas and not simply because dividend yields are rising at the hands of declining share prices.
Perhaps surprisingly to some investors, exploration and production companies in the U.S. are sporting increasingly sturdy balance sheets, facilitating more reliable dividends in the process. Those are themes that could benefit the VanEck Vectors Natural Resources ETF (NYSEArca: HAP).
HAP is a based on an index of global commodity equities. The underlying VanEck Natural Resources Index tracks companies involved in the production and distribution of commodities and commodity-related products and services involved in agriculture, alternatives (water & alternative energy), base and industrial metals, energy, forest products, and precious metals.
“After years of investment spent predominantly on growth, companies in the exploration and production (E&P) sector have shifted their business models to focus on generating sustainable returns of capital (ROC),” said VanEck in a recent note. “These returns are increasingly being delivered back to shareholders in the form of dividends and share repurchases. Although still early in the transition, returns of capital so far have demonstrated a commitment to this approach by management teams in the industry.”
What’s Is HAP Happenings
HAP offers some value because materials and energy sectors, which combine for almost two-thirds of the fund’s weight, are two of the most deeply discounted groups relative to the broader market. Another potential boon for HAP is the improving balance sheets found among exploration and production companies.
Indications point to more exploration and production companies bolstering shareholder rewards.
“As the business model required to deliver this massive supply growth inflects from one of immense upfront capital investment to one where scale and critical mass generate returns on that investment, increasingly, the companies are delivering those returns to shareholders in the form of competitive dividends and share repurchases,” according to VanEck.
Another encouraging element to the HAP story is that exploration and production earnings have been steady even amid some trying circumstances.
“Fourth-quarter earnings have been positive for the E&P sector as financial results show continued step change improvements on returns of capital to shareholders by announcing an increase in dividends and continued share repurchases,” according to VanEck. “Management teams have taken what we believe are the right steps to prove that companies can offer sustainable cash generation. This commitment to the harvesting of cash flows are at the inflection point and the industries are progressing toward competitive yields not only relative within their sector, but also against other sectors in the broader market.”
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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.