Is It Time for ConocoPhillips (COP) to Grow Its Dividend?

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For eight straight quarters shareholders of ConocoPhillips (NYSE:COP) have received the same quarterly dividend of $0.66 a share. This is now the longest streak in the past decade for a company known for frequent pay raises. Isn't it time investors got a raise?

Technically, investors did get a raise via the spinoff of Phillips 66 (NYSE:PSX). Unless you sold your shares you're getting more cash each quarter as a result. In fact, the spinoff has been so successful that Phillips 66 has already raised its dividend twice. We're not talking about a token raise either, it's gone from $0.20 a share all the way up to $0.3125 a share for 2013. That more than 50% raise is nice for Phillips 66 investors, but I'm sure my fellow ConocoPhillips investors wouldn't mind seeing some dividend growth.

I think the wait is just about over. While growth is important for the company, one of its key value propositions is to have sector-leading distributions. As you can see from the following chart, ConocoPhillips already pays a leading dividend:

COP Dividend Yield Chart

COP Dividend Yield data by YCharts

Looking at its peers, oil giant Exxon Mobil Corporation (NYSE:XOM) is currently yielding about half of what ConocoPhillips investors are getting, while leading independent Anadarko Petroleum Corporation (NYSE:APC)'s  dividend is an anemic 0.5%. Only foreign oil giants like BP plc (ADR) (NYSE:BP) really challenge ConocoPhillips in terms of yield. If income is your goal, then it's hard to beat ConocoPhillips.

Of course valuation plays a big role in the company's current stock price. The company had tried to compete with ExxonMobil and BP as a top globally integrated company but it wasn't generating the consistent returns that it expects to enjoy now that its more focused. The company's redefined strategy is focused on delivering strong, stable growth with a distribution that will entice investors who'd likely overlook Anadarko's paltry yield. Until the company actually delivers in the eyes of the market, its shares are likely to stay in deep value territory.

Part of the company's refocused efforts have it becoming a much more disciplined operator. One of those disciplines has the company planning to allocate 20%-25% of its cash flow from operations to shareholder distributions. With that, it's also targeting annual dividend growth. As it grows its cash flow, more of it will fall into the 20%-25% that's returned to investors.

The key for the company is its ability to generate returns on the other 75%-80% of cash flow from operations that's being reinvested to grow the company. The company expects this investment to yield a 3%-5% compound annual growth in production as well as 3%-5% in compound annual margin growth. Both of which will yield additional cash flow from operations for the company to then return to investors by way of increased dividends.

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