Blue Chip Yielding 5% Beckons Daredevils to Catch Falling Knife
Comment of the Day

August 03 2015

Commentary by Eoin Treacy

Blue Chip Yielding 5% Beckons Daredevils to Catch Falling Knife

This article by Michael P. Regan for Bloomberg may be of interest to subscribers. Here is a section: 

After reporting its lowest profit since 2009 and cutting in half its plans for buybacks this quarter, Exxon Mobil’s vice president of investor relations Jeffrey J. Woodbury told analysts on a conference call: ‘‘Fundamentally, we’re committed to our shareholders to continue to provide a reliable and growing dividend.”

Said Chevron Corp. chief financial officer Patricia E. Yarrington on her company’s earnings call: “We said we would cover the dividend from free cash flow in 2017. We stand by that commitment.”

Chevron is paying almost 5 percent of its share price in dividends, the most since 1992 and near the highest above 10- year Treasury yields in data going back to 1991. It’s one of 19 energy companies in the S&P 500 with dividend yields above 10- year notes, and in recent weeks it exceeded Verizon Communications Inc. as the highest yielding blue chip in the Dow Jones Industrial Average.

Can’t you almost taste the salt-water taffy, kids? Like others who have addressed the “are we there yet” question in recent months, Martin Adams at Wells Fargo offers a less-than-satisfying answer: not quite yet, kids.

Eoin Treacy's view

The energy sector offers an interesting perspective on the motivations of investors in purchasing shares over the last number of years. Often the size of the buyback program has been a more alluring factor than the dividend. The low interest rate environment has played a role in this preference and helps to throw light on why the security of energy companies’ dividends are receiving less attention than the fact that they will be buying less of their shares. 

The companies probably want to hold on to their Dividend Aristocrat credentials but many investors would probably prefer them to be supporting the share price as falling oil prices take a heavier toll. 

Exxon Mobil extended its downtrend today, countermanding last week’s upward dynamic. A sustained move above $83 will now be required to check momentum. 

The energy sector has been particularly weak and major companies have had little choice but to make changes. However investors could be forgiven for asking how secure are buyback programs in other sectors? The PKW Buyback Achievers ETF trended consistently higher, particularly between 2012 and 2014. It has lost momentum this year and a progression of lower rally highs is evident since April; within what has been a tight range. A sustained move above $49 would be required to question current scope for an additional test of underlying trading. 

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