One of the few numbers growing faster than energy stock dividends is the size of crowds convinced they are not sustainable. I’ve never witnessed a consensus opinion as negative on an entire sector as on traditional energy.
Rather than single out individual stocks, it might be more helpful for investors if I can at least add some curiosity to their views of the group, far away from the consensus conviction. Focusing on a dividend requires discipline and more conservative math. A few of the highest-quality energy producers have begun to formally align their interests with stakeholders, showing the math they are basing dividend projections on and using commodity-price assumptions that are anything but greedy.Investors are overlooking this monumental shift in mindset that has occurred since the last time oil and gas prices were this high.
Free cash flow is gushing, which support more dividends and less speculation. Even better, they can be acquired at cheap prices compared to the overall market thanks to forced selling pressure. This chart shows the current enterprise value divided by trailing 12 months of free cash flow. Each of the largest energy companies is considerably below the average of all sectors across the S&P 500 SPX, -0.67%, which is 35.
I asked my good friend Hinds Howard, a leading expert of energy pipelines, about any other recent developments that have a chance. He pointed to another project that will battle to ever get finished after three years of permitting. The original cost estimates have almost doubled just from legal work around extra regulatory delays.