SPDR Select Sector Fund - Energy Select SectorArca
Description
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Despite a big end-of-year rally in both oil and energy stocks, the energy sector remains attractively valued at the end of 2019. In fact, energy is the *only* sector that's attractively valued right now. XLE has a reasonable P/E of 15, a price-to-book ratio of 1.5, and a dividend yield at 3.7%. That's a solid return on capital, handily beating the 2.32% yield on treasuries and the 2.2% yield on the top dividend fund, DGRO. DGRO's P/E is over 18 and its price-to-book is 1.9, meaning that in that fund you pay quite a bit more for a lower yield.
The dividend yield on XLE has been improving for a couple years now, and I think the 4% dividend level is psychologically significant enough that we'll find a lot of support at that level. Some individual energy stocks, like ET and OXY, even offer dividends near 10% right now. In an overall extremely overbought market with some ongoing recession risk, this is a relatively safe long-term play that offers good value and solid returns. Did I mention that seasonal cycles favor oil right now? December through July are the traditional bull months for oil, according to the Stock Traders' Almanac. Rising geopolitical tensions with Iran and a cooling trade war with China also favor oil strength for the near future.
Hi Christopher, I love these kinds of posts. Can you clarify something on XLE? According to the last four dividends, the yield seems to be well above 5%. This takes into account a bumper dividend which went XD on 30th December 2019. Do you know why the dividend in December is much higher than earlier years? Could this be sustainable in the future, or was it a freak payout?
ChristopherCarrollSmith
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@Trickyt57, great question. Unfortunately ETF dividends are fairly opaque. There were two dividends paid this December rather than just the usual one. That suggests that the second, larger-than-usual dividend was a special dividend of some kind. However, I'm not seeing a recent special dividend by any of the fund's largest holdings, so I'm puzzled as to why that would have happened. Maybe the dividend came from some kind of unexpected efficiency in the fund's management? I don't know, but I wouldn't count on it being a recurring thing. Fidelity's page for XLE doesn't even show the bumper dividend, though I do see it on the dividendchannel page.
legoyoego
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Great post! Momentum in many energy names... I started positions in ENB TOT COP...
ChristopherCarrollSmith
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@legoyoego, of those three, ENB appears to be the best. I don't love that its 2020 earnings are expected to be a little lower than 2019, but the valuation is good and earnings are forecast to rise significantly in 2021. Beware the other two, because their earnings forecasts have been falling, so they look a little overvalued. The momentum in RIG and NIO is much more warranted right now, so I've got positions in both of those. For the dividend I like ET.
legoyoego
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@ChristopherCarrollSmith, thanks for the insight... ET came up in my screen too... I’ll check out RIG and NIO... I get most of my research through M*... TOT - “Total has also shifted more investment toward its marketing and services segment, which is less capital-intensive and whose earnings are less volatile. As a result, returns have improved to average 30% during the last five years, compared with 10% during the previous five-year period.”... COP “ Our fair value and narrow-moat rating remain unchanged despite weaker oil markets and updated guidance. Shares have traded down with the rest of the sector year to date, opening a 25% discount to our fair value estimate. In addition to valuation, ConocoPhillips offers a compelling mix of disciplined growth and cash returns unavailable in most E&Ps. Management will publish its 10-year capital and financial strategy plan in November that will outline their long-term value creation plan. We expect it to maintain the mix of capital spending discipline and growing shareholder returns that set it apart from many peers.” I read through their 10 year plan and of course they say what you expect them to - dividend increase, buy backs, protect downside while full exposure to upside... but I like the chart so I’m in for half a position in each and will see how they respond