ConocoPhillips vs. BP: Which High-Dividend Stock Should You Buy?

Here's a look at two energy majors, which offer attractive dividend yields and similar operational conditions amid a turbulent time for their sector. We pick the best income stock now.
By Chiradeep BasuMallick ,

The ConocoPhillips (COP) - Get Report and BP plc (BP) - Get Report story is a tale of many successes and challenges, at times running parallel to each other, consistently at the epicenter of global discourse on energy management.

Both of these mammoth players are also massive income-generators, more than worthy of a spot in your dividend portfolio. But which is the better option, given current scenarios? We pick the energy sector dividend champ. Our choice occupies the vanguard of other high-quality, high-yield income stocks.

The Dividend Yield factor

At a dividend yield of 6.83%, BP seems to have the edge over ConocoPhillips (a yield of 5.31%, currently). In terms of stock price performance, BP is again at an advantage, with a 2% year-to-date loss after a 17% decline in 2014. Both beat out energy rival Exxon Mobil, which offers a dividend yield of 3.8%.

ConocoPhillips, on the other hand, has also witnessed a reversal of fortunes, but, in its case, for the worse. After approximately a 2% rise in 2014, the current year has seen the company lose nearly one-fifth of its value (this explains why ConocoPhilip's dividend yield has shown an uptick).

If we glance through dividend payouts, BP and Conoco are neck and neck -- for the past three quarters BP's paid out $1.7 billion, while Conoco has remained stable at around $900 million.

However, if we push back and evaluate a slightly longer period of time, a different picture emerges. Over the last five years, BP has consistently improved its payout levels, moving from $2.9 billion in 2010, to $4.3 billion in 2011 and staying steady at $5.3 billion-to-$5.8 billion 2012-to-2014. Conoco, in comparison, is on a stable plateau of around $3.1 billion-to-$3.6 billion over the last five years. Simply put, increasing dividend margins are always a plus for yield-lovers -- placing BP way ahead of Conoco.

The Cash Flow Landscape

On a free-cash-flow-to-net-income basis, both companies are stuck in a cloudy space, having had to weather difficult times and multiple adversities over the last five years. Regardless, it's heartening to know, that, regardless of the circumstances, BP and ConocoPhilips have never failed to pay their dividends. They're among a select group of dividend stalwarts that have never disappointed income investors.

BP's ability to boost its dividend payout levels for the last two years could be attributed to its increasing free-cash-flow-to-net-income ratio (zooming to nearly 3 times in 2014). The large-scale impact of debt financing, on the other hand, can be detected in Conoco's shifting fortunes with a negative levered free cash flow (trailing twelve months) of almost $5 billion compared to $2.4 billion for BP.

The Earnings Environment

Dividend payments are obviously linked to earnings scenarios.

Conoco, which is set to post a massive drop in earnings-per-share (EPS) this year, is likely to witness a recovery of sorts in 2016. Analysts predict a similar picture for BP, with its EPS dropping by 45 this year, only to experience a 3% recovery over the next 12 months.

The five years perspective for both points to a clear winner -- Conoco's earnings are expected to drop by 7% per annum, while BP (after a 20% fall every year for the last five years), is now finally ready to kick-start a growth curve with an 8.3% rise in EPS every year for the next five years.

The Final Call

BP is way ahead of Conoco. On the road to revival and much stronger than before, BP (with 13 buy and 20 hold recommendations) is the one to go with.

And if you'd like to learn about a group of high-quality, high-yield income opportunities that are far too ignored by most investors, I urge you to check out this free presentation: 11% Yields and No Taxes.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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