A relatively safe dividend stock to avoid political risk

Investing long in anything in the run-up to the US election is a risky proposition, but energy stocks are particularly prone to volatility after the election. The two parties’ vastly different energy policies, or at least the perception that this is true, means that oil and gas stocks are an outsized risk every four years as the seemingly endless US presidential campaigns finally wind down.

History suggests that who is in the White House actually has very little influence on stock prices in general, including those in the energy sector. Each candidate talks a big game when it comes to energy, but the practicalities of power and the primacy of market forces in commodity markets mean that current policy tends to be similar regardless of party. Still, the perception is that a Harris victory in this year’s election would lead to restrictions on fossil fuels and thus be bad for oil stocks, while a Trump victory would signal the opposite.

What Has Changed?

When I first wrote here about preparing your election portfolio, it was a different time. Trump has a decent lead in the polls. Joe Biden had just resigned as the Democratic nominee, and while a dip in the fortunes of the Democratic ticket seemed likely with Harris replacing him, it was uncertain to what extent that would happen. Now we know. Harris has taken the lead in national polls and is showing leads in several swing states. More worrying for the Trump camp in…

Investing long in anything in the run-up to the US election is a risky proposition, but energy stocks are particularly prone to volatility after the election. The two parties’ vastly different energy policies, or at least the perception that this is true, means that oil and gas stocks are an outsized risk every four years as the seemingly endless US presidential campaigns finally wind down.

History suggests that who is in the White House actually has very little influence on stock prices in general, including those in the energy sector. Each candidate talks a big game when it comes to energy, but the practicalities of power and the primacy of market forces in commodity markets mean that current policy tends to be similar regardless of party. Still, the perception is that a Harris victory in this year’s election would lead to restrictions on fossil fuels and thus be bad for oil stocks, while a Trump victory would signal the opposite.

What Has Changed?

When I first wrote here about preparing your election portfolio, it was a different time. Trump has a decent lead in the polls. Joe Biden had just resigned as the Democratic nominee, and while a dip in the fortunes of the Democratic ticket seemed likely with Harris replacing him, it was uncertain to what extent that would happen. Now we know. Harris has taken the lead in national polls and is showing leads in several swing states. More worrying for the Trump camp is, in some ways, the fact that some states that were seen as safe in his control, such as North Carolina, and even previously deep-red states such as Florida and Texas, look close enough now and they’ll have to defend.

Anyone who followed the 2016 election knows that the polls can be misleading, but it’s starting to look like cautious investors should brace themselves for a Harris win.

So are oil stocks still good investments?

I still think oil and gas is a good long-term investment, whoever wins this election. The world is still dependent on fossil fuels and, despite the best efforts of environmentalists, will remain so for some time. This means that energy stocks can continue to thrive and will continue to pay good dividends that will benefit investors over the long term. For now, though, with the election months away, it’s time for them to make a strategic shift in their portfolios. As powerful as America is, its policies primarily influence US oil production, so to protect against a possible Harris win, it makes sense to shift money from US-focused companies to those more involved outside the country.

Why PBR isn’t the answer this time

My first thought was to turn to an old favorite among foreign oil stocks, Petrobras (PBR), Brazil’s national oil company. It certainly looks like a long-term value, with a P/E of around 5. However, there, too, politics could be an issue. President Luis Inácio Lula da Silva, commonly referred to as “Lula”, is back in charge and has already shown that he is not shy about meddling in the running of the PBR.

In May, Lula fired the company’s chairman, who was his own appointee, for authorizing the payment of a special dividend to shareholders. Lula believed the money should have been reinvested in the Brazilian economy and put someone in charge who felt the same way. That highlights a problem with investing in PBR. The Brazilian government actually only owns about 37% of the company, but the share structure gives it control, and I try not to invest too much money in any company where decisions are made based on anything other than maximizing profits and shareholder returns.

Looking north

This reluctance also excludes the Chinese oil majors, and the environmental lobby is so strong in Europe that I have soured a little on the big firms there, such as Shell ( SHEL ), BP ( BP ) and TotalEnergies (TTE). And if the goal here is relative stability, which it is, I won’t even think about the Middle East. That leaves Canada as a major producer with a stable, generally pro-drilling policy, and there are a few candidates out there.

Since pipelines that primarily cross the US could be affected by the outcome of the election here, I’m primarily looking at Canadian E&P companies, again with stability in mind. That brings in Canadian Natural Resources (CNQ), a $70 billion company with good free cash flow and a reasonable valuation.

Why CNQ?

CNQ’s trailing and forward P/E are both around 12; not numbers that scream value, but pretty reasonable for a company whose latest earnings showed roughly 15% revenue growth. On that basis, there may be upside potential for the stock from current levels, but part of the appeal is based on the downside being capped by a strong base formed in the second half of last year at around $30.

The other thing that attracts me to CNQ as a relatively “safe” long-term investment is that the stock is one of the “dividend aristocrats” in the Canadian markets. The 6% yield is valuable in a falling rate environment, and the company has raised its dividend for 24 consecutive years. Continued strong cash flow and a payout ratio below 60% suggest this streak can continue.

So while I don’t always like to make investment decisions based on politics, that’s what I will be doing as the US election approaches. The likelihood is that if Harris wins, as the polls now seem to suggest, pragmatism will mean that energy policy will not change, and under Biden US production has grown significantly. However, the market won’t necessarily see it that way, at least not at first, so US oil stocks could suffer. With problems in so many other places, Canada is where I’ll be coming back to, with CNQ a relatively safe, decent bet for a long-term hold.