2023-12-14 08:40:53 ET
Summary
- PetroChina's shares have rallied over 33% since October 2021, with a total return of over 60% including dividends.
- The stock's long-term technicals and valuation remain favorable, with a break above its bearish trend line and a golden cross formation.
- PetroChina's profitability metrics, such as return on equity, have been improving and there is potential for increasing returns in the future.
Intro
Our most recent commentary on PetroChina Company Limited ( PCCYF ) was back in October'2021 when we maintained a 'Buy' rating on the large-cap international oil and gas company. Since our buy rating, shares have rallied just over 33%, but the real story here is that the total return is almost double the above amount (60%+) due to Petro's very generous dividend. Principal reasons for our bullishness at the time were the stock's technicals, rising profitability , and a very keen valuation (which is still the case as we see below).
As we see below, back in late 2021, Petro finally managed to break above its multi-year bearish trend line, which resulted in a golden cross (crossing over of the stock's 10-month moving average above its 40-month counterpart) in the process. Just over two years later, shares finally look like they are beginning to lose some of their upward momentum (as evidenced by a possible bearish MACD crossover signal) but we believe downside risk remains limited in PetroChina due to the following.
Profitability
Similar to valuation multiples, profitability metrics such as Petro's 'return on equity' many times revert to their long-term average over time. Many investors tend to focus on bottom-line earnings growth when doing their due diligence on a stock's profitability but this strategy has its pitfalls. Although Petro announced record earnings for fiscal 2022 back in March of this year, the stock's return on equity for example is nowhere near being at the height of its curve.
As we see below, although we have seen a strong up-move in Petro's ROE in recent times, this key profitability metric hasn't yet managed to revert to its long-term mean.
Furthermore, the average ROE in this sector is close to 20%. Therefore, when one takes the 20% sector median ROE number into account with Petro's rising ROE trend, there is every opportunity that PetroChina will continue to report increasing returns on its equity.
Dividend
Based on a forward annual yield of $0.06 per share, Petro's forward dividend yield currently comes in at 9.72%. Many times, investors view high dividend yields as a proxy for risk, but the payout remains well covered as we learn below.
Over the past four quarters, we calculated PetroChina's GAAP dividend payout ratio (Dividend payments/Net Profits) to be 48.74%. Now, if we subtract this number from 100%, we get 51.26%, which is the retention ratio (net income retained to grow the business). The higher the retention ratio, the less risk to Petro's dividend (remember, the dividend and the retention ratio are key valuation drivers) over time. Therefore, what investors need to be asking themselves here is what could potentially make Petro's retention ratio plummet going forward. Forward-growth numbers would be the principal outlier here, but Petro's balance sheet would also dictate how long the company's almost double-digit dividend could be maintained.
Here again, we see strength as Petro's debt-to-equity ratio has dropped from a five-year average of 37% to a present 26.27%. In fact, notwithstanding interest-bearing debt, Petro's shareholder equity is now close to 20% larger than all of the company's liabilities. This put PetroChina in a strong position even in a potential down market in energy due to its solvency ratios being much stronger than its peers on average.
Value
If we invert Petro's trailing GAAP earnings multiple of 5.2 by dividing it into 100, we get a trailing earnings yield of 19.23%. This again shows how cheap PetroChina is, as it demonstrates how much shareholders would receive if management decided to pay all out the company's profits in the form of a dividend. Now, as alluded to earlier, management is currently using close to half of its net profits on the dividend, but the stock's excellent earnings yield should give comfort to long-term investors for the following reasons.
With yields of guaranteed fixed-income investments (such as the 10-year bond) receding in recent weeks (4.2% at present), look at the gap between Petro's almost 20% earnings yield and the 10-year US bond. Even if the management of Petro were to allocate its capital very unwisely going forward, a US bond investment is still starting way behind the eight-ball when it comes to potential returns. Furthermore, with Petro continuing to invest its capital in high-growth segments, investors should ask themselves whether an investment in energy or 'paper' (currency) would be a wiser bet going forward.
Conclusion
Therefore, to sum up, we continue to believe PetroChina is attractive due to its strong dividend, rising profitability, strong balance sheet, and keen valuation. Although the technicals may be pointing to some consolidation over the near term, investors need to maintain a long-term view. We look forward to continued coverage.
For further details see:
PetroChina: Stock Continues To Be A Long-Term Buy