How Much Higher Can Anadarko's Dividend Go?

Anadarko Petroleum (NYSE: APC  ) has really rewarded investors over the past year. From a token quarterly payout of $0.09 per share, the company hiked its quarterly payout 100% to $0.18 per share in August of last year. Another payout hike occurred earlier this year when management approved a quarterly payout of $0.27 per share for 50% growth.

In percentage terms, during the space of the past 12 months Anadarko has increased its dividend payout by 200%.

But how much higher can the company's payout go?

Further to go
Unfortunately, Anadarko still lags its larger peers.

What do I mean by this? Well, even with the company's new dividend payout which equals a yield of around 1% per annum, Anadarko's yield still lags that of ConocoPhillips (NYSE: COP  ) and Occidental Petroleum (NYSE: OXY  ) , which yield 3.2% and 2.8%, respectively.

Dose Anadarko have the capacity to hike its payout in line with these larger companies?

At first glance it would appear that the company does not. Based on quarterly cash flow figures for the last five quarters, the company generated free cash flow of $400 million. However, over the same period, the company paid out just under $600 million in dividends. This means that the company is currently paying out more than it can afford.

Nevertheless, Anadarko has been divesting assets over the past year, and cash from these divestments has supported the payout.

Still, while these figures do suggest that Anadarko's payout is uncovered, Anadarko's larger peer ConocoPhillips is in the same position.

Indeed, over the same five-quarter period Conoco reported free cash flow of just under $3 billion. Over the same period the company's dividend cost around $840 million per quarter. In total, over the past five quarters, Conoco paid out over $4.2 billion in dividends, $1.2 billion more than its free cash flow.

Meanwhile, Occidental behaved itself during the five-quarter sample period. In particular, during the past five quarters Occidental's 2.8% dividend yield cost the company around $400 million per quarter for a total of $2 billion. Over the same period, Occidental generated $4.3 billion in free cash flow. Actually, with plenty of free cash flow to spare Occidental could hike its payout by 100%.

Likely to improve
Even though Anadarko's cash flow doesn't cover its dividend payout, several factors make me think that the company can actually support a higher payout.

For example, management currently expects 2014 production to expand 7%-9%. Further, it expects 2014 to be an inflection year for Anadarko's US onshore operations. It expects year-on-year onshore US volumes to jump 12% for around 50,000+ barrels of oil liquids growth per day.

And it's this US onshore growth that has supported Anadarko's dividend growth during the past 12 months. Anadarko's onshore US production growth has been explosive. Management is targeting onshore production of 375,000 barrels of oil equivalent per day by the end of 2014. Back in 2009, the company's liquids production was zero.

What's more, as other international prospects come onstream, the company should only have more cash to return to investors.

All in all, Anadarko has 25 deepwater exploration/appraisal wells planned this year and 8 billion barrels of low-risk development opportunities. Success at the drill bit throughout the world this year should catapult its cash flow higher and support further payout growth.

Then there is the company's cash balance, which stood at $6 billion at the end of the first quarter. The current payout costs it less than $200 million per quarter.

Foolish summary
So overall, at first glance it appears that Anadarko cannot sustain its new higher dividend payout. However, the company has multiple growth projects coming onstream throughout 2014 and onshore US production is surging.

This production growth should support the company's dividend payout, leaving plenty of room for payout growth in the future.

All in all, Anadarko's dividend is safe and as a multitude of projects come onstream, investors could be in line for an even fatter payout.

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