by Doug Casey, Casey Research:
The world’s oil giants could soon do the “unthinkable”…
As you may know, the oil market has been a bloodbath over the past couple years. After topping $100 a barrel in June 2014, the price of oil plunged 75%. This year, oil has rebounded, but it still trades for less than half of what it did two years ago.
Low oil prices have put more than a hundred oil companies out of business since 2014. According to accounting firm Deloitte, hundreds more could go bankrupt if oil doesn’t recover soon.
Plunging oil prices have also slammed the biggest names in the sector. Exxon Mobil (XOM), Chevron (CVX), BP (BP), and Royal Dutch Shell (RDS-A)—four of the world’s largest oil companies—have lost billions of dollars since 2014.
To offset the damage, these companies have cut spending to the bone. They’ve laid off thousands of workers. And they’ve sold pieces of their business.
But they haven’t touched their dividends…yet.
As you’re about to see, these companies could soon have no choice but to cut their dividends. This could cause their shares to plunge.
Still, that doesn’t mean you should avoid all oil stocks. Today, we’ll tell you about one oil company poised to deliver big gains in the coming years.
But first, let’s look at why the world’s oil giants refuse to cut their dividends.
• Big oil companies are some of the most dependable dividend payers on the planet…
Chevron has raised its annual dividend for 30 straight years. Exxon has increased its dividend 34 years in a row. Royal Dutch Shell hasn’t cut its dividend since World War II.
For many shareholders, these dividends are a foundation of their family’s wealth. They’re “sacred”, like grandma’s ring or the family farm.
If these companies ax their dividends, investors could bail. Their stocks could crash. That’s not something these companies can afford right now.
• These companies aren’t making enough money to pay their dividends…
The Wall Street Journal reported last week:
Executives at BP, Shell, Exxon and Chevron have assured investors that they will generate enough cash in 2017 to pay for new investments and dividends, but some shareholders are skeptical. In the first half of 2016, the companies fell short of that goal by $40 billion, according to a Wall Street Journal analysis of their numbers.
That’s a big problem. According to Bloomberg Business, these four companies along with Total S.A. (TOT), the giant French oil company, have promised to pay $40 billion in dividends next year.
According to The Wall Street Journal, these companies are paying out more money in dividends than they’re making right now:
The companies spent more than 100% of their profits on dividends last year. This year, the problem got worse. In the April-to-June period, Exxon paid $3.1 billion in dividends and had just $1.7 billion in net income, according to S&P Global Market Intelligence. Shell paid $1.26 billion in interest in the first half of 2016, compared with $726 million in the same period a year earlier.
According to research firm FactSet, Chevron has a payout ratio of 249%. That means it paid $2.49 in dividends for every $1.00 in earnings over the past year.
These companies could soon run out of cash to pay dividends. But remember, these companies will do whatever it takes to defend their dividends.
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