When looking at opportunities in Latin America, many investors are naturally drawn to Brazil, its largest country and biggest economy. But that leads investors away from opportunities in other nations. Ecopetrol (NYSE: EC) is a Colombian oil and gas firm that comes very favorably with its better known counterparts in the industry such as Exxon-Mobil (NYSE: XOM), Chevron (NYSE: CVX), and Occidental Petroleum (NYSE: OXY).
The nation of Colombia has suffered from a poor image due to its crime problems. The drug wars and its reputation as a narco-state drove many away from Colombia. As a result, the success of many of its businesses such as Ecopetrol has not received the proper attention in the investment community.
The actions of the governments of Argentina and Brazil against their oil companies have also deterred investors from all of Latin America and the oil industry in specific. Argentina nationalized a huge chunk of YPF (NYSE: YPF). Brazil forced Petrobras (NYSE: PBR) to hold down prices and take an $8 billion loss in its refining division this year as part of its campaign to stamp out inflation.
As a result, Ecopetrol has very favorable financial valuations. The chart below demonstrates how well Ecopetrol compares to other “Big Oil” firms, particularly in the vital price-earnings-growth (PEG) ratio. The PEG is considered to be the most important indicator by investing legend Peter Lynch as it reveals how efficiently future earnings are priced in the share price. A PEG of 1 is considered adequate, with the lower the better.
Metric Ecopetrol Exxon-Mobil Chevron Occidental Petroleum
Dividend Yield 4.00% 2.59% 3.34% 2.84%
Dividend Payout Ratio 18.00% 22.00% 28.00% 29.00%
PEG 0.73 0.82 176.90 1.16
Sources: Finviz and MSN Money
Investors should follow money and watch Ecopetrol. Oil prices are expected to decline next year. Oil companies, no matter where the headquarters are, will drop in share price. That should be considered a buying opportunity for the long term for Ecopetrol. The share price will be lower and the dividend payment higher for those who wait for Econpetrol to fall in price.
Monitoring the dividend payout ratio is important for in establishing a portfolio of dividend-paying stocks from around the globe. Ideally, there should be a modest payout ratio along with a history of steady dividend increases. The basis for measurement should be the industry average. In this regard, it is also useful to measure a company against a competitor that is considered to be very well managed, too. For the oil and gas industry, Exxon-Mobil is considered to be run by a very effective and very efficient executive team.
It is always better to have a lower dividend payout ratio as it reveals that management of the company is allocating the capital responsibly to various corporate functions. As owners, individual shareholders should share in the earnings of the company, along with others. But a high dividend payout ratio puts a claim on the earnings that could cripple the future growth of the company. That is why the PEG is very important, too. Ecopetrol stacks up very strongly in these areas. The lower the price goes, the more attractive it becomes for long term investing.
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