Dividend Stock Analysis – IMO

[UPDATE 11/20/2014: The SeekingAlpha version of this article is available here!}

With all the hubbub over falling energy prices, energy stocks have suffered as of late. Good companies like ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) are all approaching “undervalued” territory. Many dividend growth investors are piling in, and for good reason. I’ll suspect I’ll be buying the majors soon myself. But me being me, I also like to take a look at the other stocks out there. Smaller names that most people miss are often good companies to invest in, yet few people know of them. I hope I found another hidden gem today in Imperial Oil (IMO).

Quick Background:

Quoting from Scottrade:

Imperial Oil Limited (Imperial) is an integrated oil company. The Company is engaged in the exploration for, and production and sale of, crude oil and natural gas. In Canada, it is a producer of crude oil and natural gas, a petroleum refiner and a marketer of petroleum products. The Company is also a producer of petrochemicals. The Company’s operates in three segments: Upstream, Downstream and Chemical. Upstream operations include the exploration for, and production of, conventional crude oil, natural gas, synthetic oil and bitumen. Downstream operations consist of the transportation and refining of crude oil, blending of refined products, and the distribution and marketing of those products. Chemical operations consist of the manufacturing and marketing of various petrochemicals. The Company owns and operates four refineries.

The company was founded in 1880, and is currently headquartered in Calgary, Alberta. It is currently the second-biggest oil company in Canada. The company produces roughly 247,000 barrels of oil and 280 million cubit feet of natural gas a day. A majority of IMO’s oil comes from the Alberta oil sands; IMO owns the Cold Lake oil sands operation completely, and owns a 25% stake in Syncrude, another major producer.  As mentioned above, IMO is an integrated company, meaning that it also owns refineries and chemical plants. 3 of the 4 refineries are in Eastern Canada, and one is in Alberta. On average, the refineries have a throughput of about 440,000 barrels of oil a day. The company also owns gas stations (under the “Esso” brand) and convenience stores (under the “On the Run” and “Tiger Express” brands).  (Main source)

IMO’s competitors include XOM (which owns about 70% of the company), Marathon Oil (MRO), and Hess (HES).

For more basic information, check out the company’s website and the 2013 annual report.

Fun fact: An investment of $10,000 in December 2000 would be worth $71,571.45 today, all dividends reinvested. This yields a annual rate of return of 15.2%. (Source: FAST Graphs)

Investment Criteria:

Let’s run IMO through our screening criteria to see how it does.

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (19 years)
• Has not frozen dividend for over 8 quarters: Yes
  • Since IMO is Canadian, they pay the dividend in Canadian dollars. Depending on the exchange rate, this may lead to a dividend “decrease” in USD.
• Has a Chowder number of 12 or more: No (6.3)
• Has am EPS payout ratio of less than 70%: Yes (11.82%)
• Pays a dividend monthly or quarterly: Yes (Quarterly)
  • When exactly the payout happens is apparently arbitrary, but there are always 4 payments a year.

• Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A+)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Other Bonus Ratings:

• S&P Capital IQ: Not rated
• Thompson Reuters StockReport: Not rated
• Value Line: 2 for safety; 2 for timeliness
  • Scale is 1-5, 1 being best, 5 being worst

Financial Overview:

IMO has a dividend yield of 0.96%, which is subpar for an oil company. The payout ratio is 10.6%, and the company pays out $0.48 CAD annually. Although there is plenty of room to grow the dividend, it hasn’t done a great job at it over the past 10 years. The 10 year dividend growth rate is 4.9%, the 5 year DGR is 5.3%, and the 3 year DGR is 3.8%. Clearly, the dividend is not management’s first priority. To the company’s credit, IMO has attempted to buy back shares over time, going from 994 million at the end of 2005 to 847.6 million today. However, the shares outstanding has stayed constant since 2009, so there have not been significant buybacks recently. The company’s debt-to-equity ratio is 0.28, indicating that the dividend is not in danger of being suspended due to debt payments. The company has had two 3-for-1 stock splits, in 1998 and 2006.

Please keep in mind that as a Canadian company, there is a dividend tax of 15% when the dividend is paid to a non-Canadian citizen. If you are an American (as I am), you could possibly invest in IMO in an IRA and avoid that withholding tax. You should definitely consult with a tax advisor though, should this be a concern for you.

IMO has a current P/E ratio of 11.0 and a forward P/E ratio of 12.8. This suggests that either earnings will slightly decrease or the price will get ahead of itself a small amount. IMO’s gross, operating, and net profit margins all exceed the peer groups': 21.02% vs 12.80%, 14.86% vs 2.98%, and 11.18% vs 2.77%. (Source: Scottrade) The company has a very solid balance sheet in general, and has extremely good returns on invested capital (~18% in the last three years). Finally, Morningstar rates IMO’s economic moat as “narrow” and management as “exemplary”.

According to FAST Graphs, IMO has a 5 year estimated earnings growth rate of 11.5%, and a 5 year estimated total return of 12.9%. The 5 year ETRs of IMO’s competitors are 9.2% (XOM), 15.8% (MRO), and -4.1% (HES). Since MRO spun off its lower-margin refinery business in 2011, it makes sense the MRO will perform a bit better over time. Whne IMO is compared to a more integrated peer like XOM, it appears it will hold its own over time, and possibly help drive XOM’s own returns (due to XOM’s ownership stake).

Risk Factors:

There are quite a few risks in IMO. First is that the price of oil keeps dropping, which is a negative for obvious reasons. IMO is also very geographically centralized. This isn’t much of a problem, since Canada is a very safe and stable country, but it is something to think about. Currency fluctuations are a concern. IMO reports costs in Canadian dollars, but revenue is tied to the US dollar. So a lower CAD and higher USD bode well for the company. If the USD suffers, revenues could take a hit. And of course, if the CAD strengthens, costs will be higher. IMO, although diversified, does get a lot of revenue from oil sands. Although these tend to be higher quality and successful, we have to be careful that IMO does not get too over-reliant on them.  Further, the more development takes place in the oil sands, the harder it will be to hire good labor and find cheap-yet-quality materials. Finally, as always, government regulations could stifle oil companies like IMO.

IMO isn’t well-covered on SeekingAlpha, but there are some analyses available here (bullish) and here (bullish).

Final conclusion:

I feel IMO is a buy at this time. It passes each of my criteria, except for the Chowder rule limit. I am disappointed that the company doesn’t seem to care much about the dividend, but IMO still has a solid balance sheet, excellent management, and a good position in the Canadian oil industry. The risks are there, of course, so I wouldn’t call this a riskless investment. Honestly, IMO seems like an interesting, well-run company, and I am mildly interested in buying. But first, I intend to initiate positions in or add to higher-yielding companies like XOM, CVX, and COP; that XOM position will give me plenty of exposure to IMO as it is. If you are bullish on Canadian oil, and don’t have a very large position in XOM, then go ahead and take a look at IMO for yourself.

What do you think? Does IMO make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: Long CVX

All data is accurate as of market close, 11/19/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless specifically stated otherwise.

Tags: dividend-stock-analysis, IMO, Imperial Oil Ltd