Is Devon Energy A Good Dividend Stock Pick? (NYSE:DVN)

Elevator Pitch

My Buy rating for Devon Energy Corporation (NYSE:DVN) stays unchanged. I previously wrote an article about DVN on January 4, 2022, where I highlighted my expectations of “Devon Energy’s share price continuing to climb in 2022.” DVN’s shares have since increased by +37% from $46.27 at the point of my earlier article’s publication to $63.54 as of April 18, 2022.

I will focus on Devon Energy’s appeal as a dividend stock pick in this latest article. Based on my analysis of its dividend safety and dividend yield, I view DVN as a good dividend pick. Devon Energy will become an even more attractive dividend play when its fixed dividend payout increases going forward. As such, I rate Devon Energy’s shares as a Buy.

DVN Stock Key Metrics

Before assessing DVN’s key metrics relating to dividends, it is necessary to first learn more about Devon Energy’s dividend payout structure. Devon Energy has a fixed plus variable dividend payment structure, where it pays out a quarterly fixed dividend per share of $0.16 and a variable dividend that can be as high as “50% of excess free cash flow” according to its Q4 2021 earnings call presentation.

There are a number of key metrics relating to Devon Energy that dividend investors should watch.

Firstly, DVN’s total dividends (fixed and variable) paid increased by +194% from $0.34 per share in the first quarter of 2021 (used as a point of reference as DVN’s merger with WPX Energy was concluded in the same quarter) to $1.00 per share in Q4 2021. On a full-year basis, Devon Energy’s total dividends per share grew by +190% from $0.68 in fiscal 2020 to $1.97 in FY 2021. DVN certainly scores well on the dividend growth metric.

Secondly, Devon Energy revealed in the company’s fourth-quarter results presentation that it has paid out dividends every year for close to three decades (more specifically 29 years). The consistency of dividend payments for DVN from a historical perspective is definitely a plus point for investors considering the stock as a dividend play.

Thirdly, DVN is increasing its quarterly fixed dividend payout from $0.11 per share in FY 2021 to $0.16 per share in FY 2022. This has significant implications for Devon Energy’s dividend safety which I will elaborate further in the next section.

In summary, the key metrics highlighted above suggest that Devon Energy is a decent dividend stock pick. In the subsequent two sections of this article, I will delve deeper into DVN’s dividend characteristics, or more specifically the dividend safety and dividend yield factors.

Is DVN Stock’s Dividend Safe?

DVN has guided for the company’s FY 2022 total dividends per share to double as compared to its dividend payout per share of $1.97 in FY 2021 as highlighted in its Q4 2021 earnings presentation.

I think that Devon Energy’s 2022 dividends are safe for two key reasons.

Firstly, Devon Energy has declared its intention to increase the fixed component of its total dividends from $0.44 per share in FY 2021 to $0.64 (new and higher quarterly dividend per share of $0.16 mentioned earlier) per share in FY 2022. The fixed dividend component does not vary with DVN’s actual cash flow generated, and the increase in the fixed dividend is a sign of management confidence in the company’s 2022 financial performance.

More significantly, Devon Energy disclosed at the company’s Q4 2021 earnings briefing that the FY 2022 fixed dividend guidance of $0.64 per share was determined based on an assessment of “our cost structure and what we thought was sustainable going forward based on our mid-cycle pricing (i.e. $60-65/bbl oil).”

Notably, the $0.16 per share quarterly fixed dividend is equivalent to a payout ratio (fixed dividends as a proportion of cash flow) of around 7.5%. DVN’s targeted payout ratio for fixed dividends is in the 5%-10% range. There is a good chance that Devon Energy’s fixed dividends could continue to increase going forward. Devon Energy emphasized at its Q4 2021 investor call that “there’s a high likelihood that we’ll have the opportunity to grow that fixed dividend further as we move forward”, and estimated that “it will likely gravitate towards the higher end of that payout range, somewhere closer to 10%.”

Secondly, Devon Energy’s variable dividend expectations for FY 2022 are based on the assumption of a $85/bbl oil price. This seems conservative compared with the U.S. Energy Information Administration’s current 2022 oil price forecast of $97.96/bbl. This means that it is less likely that Devon Energy’s 2022 cash flow and variable dividends fail to meet the company’s guidance.

DVN’s FY 2022 stock dividend is safe, considering the various factors discussed above.

Is Devon Energy’s Dividend Yield Good?

Devon Energy offers a very attractive forward FY 2022 dividend yield of 6.2% based on the company’s dividend guidance of $3.94 per share this year and its closing price of $63.54 as of April 18, 2022. The dividend yield for the S&P 500 is substantially lower at 1.4%.

DVN had earlier noted at the company’s most recent quarterly earnings call that “we are on pace to essentially double our dividend again in the upcoming year” and this forms the basis for the FY 2022 dividend per share assumption of $3.94.

Even if one assumes the worst case scenario that DVN only pays out fixed dividends ($0.64) and omits variable dividends in full, the stock will still offer a reasonable forward fiscal 2022 dividend yield of 1.0%.

In a nutshell, I think that Devon Energy’s forward dividend yield is good enough for any income-focused investor.

Is Devon Energy A Good Long-Term Stock?

A good long-term stock is one where the company allocates capital wisely. In the case of companies in the energy sector, the worst thing to do from a capital allocation’s perspective is to reinvest significant cash flow or capital at the peak of the energy cycle. In that respect, Devon Energy clearly stands out.

In its Q4 2021 earnings presentation, DVN stressed that it is “prioritizing free cash flow over volume growth” and guided for at least a +70% increase in free cash flow this year vis-a-vis 2021. In other words, Devon Energy does not intend to increase its investments in a significant manner to drive higher volumes in 2022 despite elevated energy prices.

Instead, Devon Energy is still very much focused on deleveraging and returning more capital to shareholders. DVN’s net debt-to-EBITDAX ratio was 0.8 times as of December 31, 2021, and the company’s goal is to further reduce its net debt-to-EBITDAX ratio to an even lower 0.5 times by the end of this year.

In terms of shareholder capital return, Devon Energy still has approximately $1 billion remaining from its current share buyback authorization as of mid-February 2022, apart from dividends as discussed in this article. More importantly, DVN highlighted at its most recent earnings briefing that it will “be opportunistic about buying (back) shares.” This suggests that DVN will not destroy shareholder value by doing share repurchases aggressively when its shares are overvalued, but it will be patient in waiting for buying opportunities.

I am of the view that Devon Energy is a good long-term pick, as it places a great emphasis on free cash flow growth and shareholder capital return.

Is DVN Stock A Buy, Sell, or Hold?

DVN stock is a Buy. Devon Energy is an appealing dividend play, and I have a favorable view of DVN’s capital allocation policies and priorities. A positive re-rating catalyst for the stock will be an increase in the fixed dividend payout ratio for the company from 7.5% now to 10% in the future.