Devon Energy Corp: Giving Shareholders $100 Million in “Bonus Checks?”
A Dividend Bonanza from an Unlikely Industry
If you’ve been following the markets, you’ll know that the energy sector isn’t really in the best shape at the moment. With the COVID-19 pandemic—and the subsequent plunge in oil prices—a lot of energy companies have been struggling. To give you an idea, the S&P 500 Energy Sector Index is down more than 40% year to date. (Source: “S&P 500 Energy,” S&P Dow Jones Indices, last accessed September 10, 2020.)
And yet, one energy company is delivering a dividend bonanza to its investors.
I’m talking about Devon Energy Corp (NYSE:DVN), an oil and natural gas exploration and production (E&P) company headquartered in Oklahoma City, Oklahoma.
Devon Energy has been paying regular quarterly cash dividends to its common stock investors since 1993. At the beginning of this year, it had a quarterly dividend rate of $0.09 per share.
Given the coronavirus outbreak and the economic slump that came after it, most income investors would probably be happy if their portfolio companies could maintain the dividend. But Devon Energy decided to do more: on February 18, 2020, the company’s board of directors announced a 22% increase to DVN stock’s quarterly cash dividend, bringing it to $0.11 per share. That dividend was paid on June 30. (Source: “Devon Energy Announces 22 Percent Increase in Quarterly Dividend,” Devon Energy Corp, February 18, 2020.)
And, while the energy industry entered a major downturn, the company still decided to stick with the oversized dividend. On June 3, Devon Energy’s board declared another $0.11-per-share cash dividend, which will be paid on September 30, 2020 to shareholders of record as of September 14. (Source: “Devon Energy Announces Third-Quarter 2020 Cash Dividend For Common Stockholders,” Devon Energy Corp, June 3, 2020.)
With DVN stock trading at $8.87 per share, its current quarterly dividend rate comes out to an annual yield of five percent.
To put that in perspective, the average dividend yield of all S&P 500 companies is just 1.79% at the moment. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed September 10, 2020.)
But that’s not all.
On August 4, Devon Energy’s board of directors authorized a $100.0-million special dividend, which translates to $0.26 per share of DVN stock. The special dividend will be paid on October 1, 2020 to shareholders of record as of August 14. (Source: “Devon Energy Provides Barnett Update, Announces Special Dividend and Outlines Next Steps in Cost-Reduction Plan,” Devon Energy Corp, August 4, 2020.)
Note that this $0.26-per-share special dividend is a payment on top of the company’s regular quarterly dividend.
The reason why Devon Energy is paying this special dividend now is that the company will complete its Barnett Shale divestiture earlier than expected. The transaction was previously scheduled to close on December 31, 2020, but the company has accelerated the closing date to October 1. Devon Energy expects to receive a net cash payment of over $300.0 million at closing.
The business has also improved at this E&P company. In the second quarter of 2020, Devon Energy averaged production of 153,000 barrels of oil per day, which not only represented a six-percent increase year-over-year, but also exceeded management’s midpoint guidance by 3,000 barrels per day. In particular, Eagle Ford and Anadarko Basin delivered better-than-expected base production performance. (Source: “Devon Energy Reports Second-Quarter 2020 Financial and Operational Results,” Devon Energy Corp, August 4, 2020.)
At the same time, the company’s operating costs, which include production expenses, general and administration (G&A) expenses, and financing costs, declined 14% year-over-year to $13.92 per oil-equivalent barrel. Notably, Devon Energy managed to lower its second-quarter G&A expense by 31% from a year ago.
Furthermore, the company’s $203.0-million capital spending in the second quarter was 10% below the midpoint of its guidance. In these hard times, being thrifty is good news to investors.
Going forward, maintaining quarterly dividends is one of the free cash flow priorities for Devon Energy. In particular, management expects the company to have more than $2.0 billion in cash balance plus expected excess cash flow in the second half of 2020. The plan is to spend $0.2 billion of that money on quarterly and special dividends and $1.5 billion on debt reduction, and retain up to $0.5 billion as cash on hand to provide working capital flexibility. (Source: “Q2 2020 Earnings Presentation,” Devon Energy Corp, August 4, 2020.)
In the second-quarter earnings conference call, Devon Energy’s chief financial officer, Jeff Ritenour, said, “With regards to our dividend policy, we plan to maintain our quarterly dividend and target a sustainable payout ratio of up to 10% of operating cash flow at a mid-cycle pricing.” (Source: “Devon Energy Second Quarter 2020 Q&A Commentary Transcript,” Devon Energy Corp, last accessed September 10, 2020.)
Bottom Line on Devon Energy Corp
At the end of the day, keep in mind that nothing is carved in stone, especially in the volatile energy sector. But, by delivering generous quarterly dividends and a sizable “bonus check,” Devon Energy stock stands out when it comes to returning cash to investors.