Here’s where it gets tough for investors…

As longtime DailyWealth readers know, you can make huge gains as a stock goes from “bad to less bad.” But should you buy at “things are great” levels?

In the depths of the credit crisis, I recommended buying shares of supermajor oil producer ConocoPhillips to readers of the S&A Resource Report. Shares had been clobbered and were trading for around $46.

We endured a small dip just after purchasing the stock in February 2009, but as you can see from the chart below, it’s been a big run higher ever since. The past five months in particular have been incredible for this income producer…

Before we say ConocoPhillips’ run has pushed the stock too high to buy, let’s take a closer look…

[ad#Google Adsense]From 2000 to today, ConocoPhillips grew its reserves 65% from 5 billion barrels to 8.3 billion barrels. Its oil reserves grew 40%, and its natural gas reserves grew 128%. (In contrast, ExxonMobil barely grew its oil reserves and only grew its gas reserves by one-third.)

ConocoPhillips also has an aggressive growth strategy. It plans to spend $12 billion (of its $13.5 billion capital budget) on exploration and production. Nearly half of that money is going to North America… and the Eagle Ford shale in particular.

The Eagle Ford is arguably the largest oil and gas field discovered in the lower 48 states in the last 30 years. ConocoPhillips owns 254,000 acres in the heart of the play. Developing that field will be a major focus for the company this year.

We can buy ConocoPhillips’ existing reserves for $13 per barrel of oil equivalent. That’s cheaper than either ExxonMobil or Chevron. And the stock trades at 9.6 times its 2010 earnings… below its 10-year average of 11.6 times earnings.

So ConocoPhillips is a solid, growth-focused oil producer trading at a good price. Now here’s where it gets really interesting, especially for income investors

In 2010, ConocoPhillips paid out 88% more cash to shareholders than it did in 2005 – about $3.2 billion total. And it has increased its dividend every year for the past five years by an average 12% per year. It sports a current yield of 3.6%.

[ad#ChinaBlankCheck]What you might not know is that it bought back another $2.6 billion of shares. By reducing shares outstanding, the company increased the value of the shares we owned. That added an extra 4% boost to our yield.

The company plans to buy back another $10 billion of shares this year. Between actual dividends and share repurchases, that would give us a combined annual return of 13% at the current price.

So… do you buy here? Well, I like the stock even at this price. But crude oil could drop. And stocks in general have skyrocketed since September. This is a recipe for a short-term correction in ConocoPhillips shares.

If the stock declines 8%-10% in the next month or two to the $68 area, I’ll like it even better. At that price, I’d recommend loading up… and collecting big oil dividends.

Good investing,

— Matt Badiali

[ad#jack p.s.]

Source:  Daily Wealth