Here at StreetAuthority, we're constantly on the lookout for stocks worthy of our Top 10 Stocks advisory -- and a stock doesn't attain that status by accident.
One energy company in particular is a perennial Top 10 Stocks favorite. I profiled this company two years ago, calling it "the safest oil stock to buy." The results since then haven't been bad at all.
Including dividends, investors who held shares of ConocoPhillips (NYSE: COP) enjoyed a compound annual growth rate of 31.8%, handily outperforming the S&P 500 Index's rate of 27.3%.
One might think that COP's chart indicates its run is done. Quite the contrary.
Still The Safest
Hands down, ConocoPhillips' proven reserves are in some of the most accessible -- both physically and politically -- on the planet. At the end of last year, 78% of its proven reserves (oil or gas known to be in the ground in areas the company drills) were in North America or Western Europe.
Now, "safe oil" is also expensive oil. More hospitable and developed countries mean political stability but more regulation. That's the trade-off for uninterrupted flow. (There's still money to be made on cheaper, less safe oil, such as with French oil giant Total (NYSE: TOT), which I profiled last month.)
However, conservative investors require a more dependable income stream, preferably with the potential for growth. By the numbers, ConocoPhillips can deliver just that.
After spinning off its refining unit, Phillips 66 (NYSE: PSX), last year and becoming a stand-alone exploration and production company, ConocoPhillips has been on a divestiture tear. It's been piling up cash, only to plow it back into capital expenditures, thus boosting cash flow. Since last November, the company has raised more than $12 billion by selling stakes in various projects and other assets. This will help fund the company's commitment to spending $16 billion a year in capital projects.
Management's goal is to add a million more barrels a day in production capacity by 2016, an ambitious 66% increase from its current output of 1.5 million barrels a day. The focus will be on North American production. (Again, "safe oil.") Sixty percent of ConocoPhillips' capital spending program will be directed toward the epicenter of the American energy renaissance: the Permian Basin and the Eagle Ford and Bakken shales.
The aggressive growth plan can be supported thanks to an ironclad balance sheet. The company's long-term debt-to-capital ratio is a comfortable 32%. Thanks to its asset sales and strong cash flow of $11 billion a year, ConocoPhillips doesn't require a lot of debt financing. In fact, management has also committed to increasing cash flow by $6 billion by 2017, an increase of over 50%.
But what about the dividend? Dividend payout ratio is at a reasonable 45%, and analysts are confident the dividend can be maintained thanks to the company's history of prudent financial management and earnings growth. Last year, ConocoPhillips earned $5.40 a share. The 2013 forecast calls for modest earnings per share growth to $5.84, a 7% increase; the 2014 outlook is even more ambitious, calling for earnings of $7.04 per share. This would equate to annual earnings growth of 10% -- which is very strong for an $89 billion company.
Risks to Consider: The biggest risk to investing in an oil company is geopolitical risk, but COP has protection against this because nearly 80% of the oil ConocoPhillips pulls from the ground is in stable, accessible areas. Declining energy prices can also put pressure on production margins and affect profitability.
Action to Take --> Although COP has made a significant move over the past couple of years, the stock still represents an excellent value and investment opportunity thanks to the company's large cash reserve, strong cash flow and well-managed balance sheet. Shares currently trade a little above $70 with a 3.8% dividend yield and a forward price-to-earnings (P/E) ratio of 12.3. Considering ConocoPhillips' consistent earnings growth, increasing cash flow and stable sources of reserves, my 12-month price target is $92.