When investors look at a stock’s performance, start and end dates can be very important. For example, in the last three years, Suddenly petroleum (oxy -0.45%) Looks like an industry standout. However, if you change the time frame, in this case a bit longer, the story starts to change. Here are some numbers you may want to look at before buying Occidental Petroleum.
Over the past three years, a $10,000 investment in Occidental Petroleum or Oxy would have turned into about $41,000. That’s a pretty impressive result, especially when you compare it S&P 500 The index ETF, which would have risen in value to $14,700, or the energy industry giant Chevron (CVX 0.20%), which turned $10k into a touch under $20k. These are stock-only returns, which do not include dividend reinvestment.
If you look at total return, Oxy’s numbers don’t change much because its dividend is so modest. In fact, it was only a token penny for about half the period. So the dividend reinvestment added another $650 or so to the total value of that $10,000 investment, bringing it to $41,650. Chevron’s higher and more stable dividend reinvestment increased from $10,000 to $22,850. Meanwhile, the S&P 500 index has seen dividends increase by $10,000 to $15,400 over the past three years with reinvestment.
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Oxy’s dividend is indeed an important factor, although it doesn’t add much to returns over the past three years. Notably, it was reduced from $0.79 per share per quarter to $0.01 in 2020. It didn’t start growing again until the second quarter of 2022. After two increases, it’s only $0.18 per share per quarter, which is still a long way off. Below is where it was before the cut.
If you didn’t take the time to do a little digging here, you might guess that dividends were cut in 2020 due to the energy recession, due to a drop in demand as economies around the world shut down to slow the spread of COVID-19. . That is somewhat true, but far from the full picture. What actually happened was that management signed off on a poorly-timed, financially aggressive, and debt-financed acquisition in 2019 that it couldn’t afford when energy prices went south.
Given the fact that the dividend is nowhere near the pre-cut payout, you could argue that the company is still working to deal with the consequences of the merger. For example, Oxy’s debt-to-equity ratio is around 0.63 times today, even after a big recovery in oil prices. That compares to 0.15 times for Chevron. So the astute investor will be wondering what happens to the performance numbers if you pull back before the acquisition.
Over the past five years, a $10,000 investment in Oxy would have turned into $9,150 on a stock-only basis and about $10,500 when looking at a total return. The same investment in Chevron would have turned out to be $14,450 on a stock-only basis and less than $18,000 with dividend reinvestment. From this perspective, Oxy goes from being a standout performer to trading water.
Obviously, timing is important. However, even the best investors in the world do not know the right time to buy stocks. To highlight this point, Warren Buffett Berkshire Hathaway Oxy’s purchase of preferred shares helped get its ill-timed deal across the finish line. It is unlikely that Buffett knew in advance that the outcome would be so dire.
The energy field is highly cyclical, so playing it safe is probably a good call. This favors a conservatively managed industry giant like Chevron over a more focused and aggressive player like Oxy. But you have to consider several periods of time, performance-wise, to see how the slow and steady approach has won out.