Two Reasons Why Devon Energy Stock Is Likely to Keep Rising This Year

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DVN stock - Two Reasons Why Devon Energy Stock Is Likely to Keep Rising This Year

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  • Devon Energy (DVN) recently raised its fixed and variable dividend to $1 quarterly, giving it a 6.6% yield
  • This is likely to increase, as the variable portion of the dividend (84 cents) rises with higher free cash flow (FCF)
  • Devon has dramatically expanded its buyback program to $1.6 billion, or 4% of its market capitalization, pushing DVN stock higher

Devon Energy (NYSE:DVN) was the best performing stock in the S&P 500 last year. This was because of its super generous dividend and buyback policy. DVN stock is on its way again this year. Year-to-date (YTD) it’s up 37.63% as of March 22, at $66.63 per share.

And now, with Devon’s significantly higher buyback policy, there are two good reasons to believe it could move much higher: its dividends will likely rise and its buybacks will push DVN stock higher. This article will discuss both reasons.

DVN Devon Energy $66.63

Devon Energy’s Shareholder Capital Returns

Devon announced on Feb. 15 that it upped its buyback authorization to $1.6 billion by 60 percent. That works out to 4% of its $40.3 billion market cap. If it were to buy back this amount in one year that would use up 55% of the $2.9 billion in FCF it generated last year.

And there is every reason to believe it can do this in one year or a little more. For example, the $1 per share in fixed and variable dividends will eat up about only $664 million in capital. The reason is there were 664.2 million shares outstanding as of Feb. 2., according to its latest 10-K filing.

So the buyback and dividends will only cost $2.264 billion, or just 78% of its $2.9 billion made FCF last year. That still leaves room for the company to pay down debt or make acquisitions.

Estimating Dividends for DVN Stock

Moreover, there is good reason to believe that Devon Energy can likely raise its free cash flow this year and hence its variable dividends. We can put together some numbers which illustrate this.

First, last year we know that in 2021 Devon produced 209 million barrels of oil equivalent (MMBoe) based on page 10 of its 10-K. As its revenue for the year was $12.206 billion, that implies that its average barrel of oil price equivalent was $58.40 for the year.

But so far this year, it is probably making twice that amount. Just to be conservative let’s say that it makes $100 per barrel this year on average. In its 2022 guidance, Devon said that it will produce 570,000 to 600,000 barrels of oil equivalent daily. That works out to an annual rate of 208 million barrels of oil equivalent (MMBoe) to 219 MMBoe.

Therefore, if we multiply these MMBoe forecasts by $100/barrel you can see that revenue will skyrocket to between $20.8 billion and $21.9 billion. Again, that is up from $12.2 billion last year, or a rise of 70.5% to 79.5% in sales this year.

Moreover, last year, the company’s operating cash flow margin was 40% (i.e., $4.899 billion/$12.2 billion). Therefore, this year we can assume that its operating cash flow will be about $8.5 billion at the midpoint of the revenue targets. After deducting the fixed dividend payments of $106 million and $2.44 billion in capital expenditure (capex) from its guidance, its FCF will be $5.966 billion.

The variable dividend deducts 50% of FCF, so it could be $2.98 billion. Let’s call it $3 billion. Since there are 664 million shares, the variable dividend could be as high as $4.52 per share this year.

After adding back the 16 cents in fixed dividends, the total dividend this year could reach $4.68 per share. That is 17% over the $4 present dividend rate.

What to Do With DVN Stock

If DVN stock has a $4.68 per share dividend, the yield at today’s price of $66.63 will be 7%. That is likely too high, and I suspect the stock will rise to at least a 6% yield, or $78. That is seen by dividing $4.68 by 6% — the result is $78 per share.

In other words, by assuming the average realized oil price this year will be $100, and using a 6% yield, we can estimate the DVN stock price will rise 17% more. If the yield falls to 5% the stock will rise to $93.60 (i.e., $4.68/0.05), or 40% higher.

So, you can see that even though DVN stock is up 38% YTD, it could still easily rise between 17% and 40% higher. The mid-point is 28.5% higher or $85.62 per share.

And we haven’t even factored in the effect of the share buybacks yet. That will increase the dividend per share by reducing the shares outstanding. It will also act as a catalyst pushing DVN stock to this price target. Bottom line: expect DVN stock to rise higher.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/dvn-stock-two-reasons-why-devon-energy-is-likely-to-rise-this-year/.

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