Looking at the 5-year chart of ConocoPhillips (COP) stock paints and ugly picture of the current market conditions surrounding commodities, particularly oil. Looking at this chart alone, one would assume that a 5-year investment in ConocoPhillips would have delivered hideous returns.
This is why I dislike stock charts. They are dirty, rotten liars.
Stock charts are useful when showing the performance of pure growth stocks. When dividends, dividend re-investments, splits and spin-offs are thrown into the mix, they do not even begin to tell the real story.
ConocoPhillips’ stock has been decimated through the now year-long oil collapse. After closing at a high of $86.76/share on July 23, 2014, the stock closed on $51.19/share on Friday, October 2, 2015. This is down $6.07 from its 5-year closing price of $57.26/share on October 4, 2010. One may assume that if they were to have invested in ConocoPhillips 5 years ago, they would have seen a total return of -10.60%, or a Compounded Annual Growth Rate (CAGR) of -2.22%.
But is this really the case? Let’s take a look at what would have happened to an investor that invested $100,000.00 in ConocoPhillips on October 4, 2010.
A 5-Year Investment In ConocoPhillips
An investor that wrote a single check in the amount of $100,000.00 would have purchased 1,746.421 shares of ConocoPhillips stock with a current market value of $89,399.29.
Along the way, the investor would have collected $23,698.93 in cash dividends.
Phillips 66 Spin-Off
On April 12, 2012, ConocoPhillips spun off its downstream business, Phillips 66, which trades under the ticker (PSX). Individual investors received ‘1’ share of Phillips 66 stock for every ‘2’ shares of ConocoPhillips stock they owned. That means our investor would have received 873.2105 shares of Phillips 66 stock.
Phillips 66 closed at $79.48 on October 2, 2015, implying our investor’s stake in Phillips 66 has a current market value of $69,402.77. Along the way, they would have collected $4,128.10 in cash dividends.
Our hypothetical investor would have seen their total return on their $100,000.00 at current market value with dividends collected amount to $186,629.09. This amounts to a Compound Annual Growth Rate (CAGR) of 13.29%
CAGR With Re-Invested Dividends
But what if our hypothetical investor reinvested all of their dividends along the way into their respective companies? How would the investor have fared?
Re-investing dividends from ConocoPhillips back into ConocoPhillips stock would have seen the initial stake increase from 1,746.421 shares to 2,149.967 shares with a current market value of $110,056.80.
During the PSX spin-off, the ownership stake in ConocoPhillips would have been 1,842.4285 shares, translating into 921.214 shares of Phillips 66 owned post spin-off. With dividends from Phillips 66 reinvested, the investor would have seen their stake increase to 985.2174 shares and a market value of $78,305.08.
This combined stake in COP and PSX would have a current market value of $188,361.88, or a CAGR of 13.50%.
The Power Of Reinvested Dividends
Because of the severe collapse of oil prices over the past year, the power of reinvested dividends is understated in this example because ConocoPhillips’ stock price is down -10.60% from its original purchase price. While the return is statistically equivalent between both scenarios at this given date at current market prices, reinvesting dividends increased the investor’s ownership stake in ConocoPhillips 23%, increasing shares owned from 1,746.421 to 2,149.967 in a 5-year period.
If ConocoPhillips was trading at the original buy-in price of $57.29/share, the total market value of the combined COP/PSX investment would be $201,476.68 for a CAGR of 15.04%.
If ConocoPhillips was trading at its peak market price of $86.76/share, the total market value of the combined COP/PSX investment would be $264,836.20 for a CAGR of 21.51%.
When investing in oil companies, the investor is being paid to absorb the volatility of the commodity. The oil industry is cyclical, and booms and busts are just business as usual. Once the oil market eventually recovers, ConocoPhillips will see its share price recover in kind as earnings recover with the rise in commodity prices. I, personally, see current conditions as a buying opportunity. The yield of ConocoPhillips is a whopping 5.78% at current market prices. While there is no guarantee the dividend will not be frozen, reduced or suspended in the medium-term, ConocoPhillips’ management has done its best to bolster investor confidence by declaring a dividend increase on July 16, 2015. Alas, nothing is guaranteed in investing, which is where the risk-reward equation is balanced. However, as long as the dividend is maintained, investors could see their share accumulation accelerated in this price-depressed environment as massive yields facilitate the purchase of new stock. Once oil prices do recover, the investor that took the risk could see themselves rewarded handsomely.
While stock charts imply a return on ConocoPhillips stock of -10.60% over a 5-year period, the true buy-and-hold long term investor would have seen a CAGR as high as 13.50%, for a total return of 88.36%. This goes to show how misleading stock price charts can be at showing real returns.
As always, nothing is guaranteed in investing, but this highlights how investors really need to do their research before selecting equities to place their hard-earned money in. Things are not always what they seem.
Note: This example does not account for the effects of taxation, inflation, or any brokerage fees collected. This is merely meant to be an example. Past history is no guarantee of future performance. There is always risk in investing.
All information found herein, including any ideas, opinions, views, predictions, commentaries, forecasts, suggestions or stock picks, expressed or implied, are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. I am not a licensed investment adviser.