An Energy Pick with a Capital E

03/26/2013 10:09 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Don't be fooled by its sizable yield...this Italian company has multiple opportunities for growth ahead, not least a boost from any recovery in Europe, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Way back on March 12, I promised that I was going to add a stock to my Dividend Income portfolio soon (on March 13, I said).

Well, I didn’t make the add then, and I’ve been waiting for the predictable volatility of this market to give me a better entry price. I got that price today, so I’m finally making my add to that portfolio.

I’m going to take advantage of today’s 1.6% drop to recommend buying shares of Italian oil company Eni (E). It’s not surprising that shares of Eni are down today—the Milan index closed down 2.5% today in reaction to the Cyprus “solution.”

But today’s drop brings the total decline since the January 17 high to 10.9%, and it pushes the dividend yield close to my 5% target level. (The yield is 4.95% on March 25, based on the paid September 2012 dividend and the declared dividend scheduled for May 20.)

And I think you might even get some growth out of this oil stock. The company is the largest producer of oil and gas in Africa of any of the international oil companies. And with Africa showing some of the most interesting new finds in the world—like the huge Area 4 natural gas discovery (an estimated 75 trillion cubic feet of natural gas) in Mozambique, Eni has a very attractive growth path.

(But, just to mention...Eni has agreed with Anadarko (APC), another big player in natural gas in Mozambique, to build a plant to liquefy and export natural gas. That’s likely to prove a very expensive venture, because almost all infrastructure for the plant will have to be built from scratch in Mozambique.)

What’s reassuring to dividend investors about Eni is that much of its forecast increased production—600,000 barrels a day by 2016—will come in the 2013 to 2014 period.

In fact, 75% of new production forecast by 2016 will come in 2013 and 2014. For example, the giant Kashagan field in the Caspian Sea is expected to start production in June 2013. The field is thought to be the largest discovered in the last 30 years.

That will help diversify the company’s production and lower Eni’s risk from its production in volatile countries such as Libya. And it should give the company plenty of cash flow to cover dividends and share buybacks even after capital spending.

Eni doesn’t always get the most out of its assets. The Italian government’s 30% stake means that Eni is, for what amounts to political reasons, engaged in businesses such as chemicals and electricity production that don’t have very attractive returns.

To me, that says I wouldn’t want to make this a long-term holding while I waited for growth to compound. But at the right moment and at the right price, this is a solid dividend play with some price upside for a two- or three-year period.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.

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