A Dividend Payer Immune to the Euro

Global equity markets continue to reel from concerns over the sovereign solvency of European nations (cue Greece, Spain, Portugal and Ireland), resulting in widespread contamination. As markets around the world continue to decline, investors are reminded that correlations do in fact tend to 1 in the extremes.

As all stocks are painted with the same brush, compelling opportunities do emerge for value conscious and income-seeking investors. One such company is Norwegian oil giants Statoil (STO). The $61 billion market cap company is yielding 5.33% in dividends at a price of $19.21. Over the past four weeks, Statoil (STO) has been hammered 22%.

Statoil (STO) is an international energy company with operations in 40 countries. Having been in existence in Norway for over 35 years, the company has 29,000 employees worldwide, and is listed on the New York and Oslo stock exchanges. 2009 revenues came in at $71 billion while net income was $2.8 billion. Even though 2009 earnings represented a 57% decline on 2008, the company raised it’s dividend from $0.68 to $0.93, representing a 36% increase.

The dividend has grown 13.52% per year for the past five years, while earnings have remained fairly flat if you exclude the drop in 2009. Despite the earnings not going anywhere and dropping significantly in 2009, cash generated by operating activities continues to boom: $11.2 billion was generated in 2009, and $15.8 billion the year before that.

Statoil seems to be showing decent value for the dividend seeking investor. The Price to Earnings ratio is 15.44, while the Price to Sales is 0.82. Price to Book as per the latest quarter is 1.86 and the Price to Cash flow comes in at an appetizing 5.04 times. Using the dividend discount model (P=D/(k-g), and assuming that Statoil can grow dividends at 8% indefinitely, and using a 12% discount rate, one arrives at a value of $23.25. The current price at $19 and change shows that there is some value to be had in this dividend stream.

The question is, though, given the company’s exposure to oil and gas price fluctuations, how stable is the dividend? As outlined above, despite the earnings plummet of 57%, the dividend in fact increased 36%. Cash flow from operations only declined 26% giving some idea of the financial strength and cash generating ability of Statoil (STO).

In addition to the cash generation and the higher dividend, there is another catalyst that investors are overlooking: The company is also pushing forward with a global expansion plan, with a particular focus on Angola. Statoil (STO) has been in the former Portuguese colony for 17 years and is now a partner in nine producing fields, which contribute more than 200,000 barrels of oil per day. Statoil (STO) has delivered more than 30% annual production growth since 2001 and Angola is one of the main contributors to this incredible growth. The Angolan economy is expected to grow more than 9% this year, making it potentially the fastest growing economy in the world.

Also bear in mind that Norway is not part of the Euro Zone, and as such does not use the euro currency. This is an oft-overlooked fact and should provide much comfort to any dividend-seeking investor looking to maximize yield and avoid poor currency exposure.

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