ConocoPhillips (COP -0.62%) used to be one of the elite income stocks in the oil patch paying a generous and steadily rising dividend. However, that came to a screeching halt in 2016 when the company slashed its payout by 66% to better match cash outflows with its declining inflows after oil prices collapsed. This decision, combined with other cost savings initiatives and assets sales, enabled it to push its cash flow breakeven level from requiring crude above $75 a barrel to less than $40.
As a result, the company has been able to begin returning more cash to investors, via both a higher dividend and share repurchases. In fact, the aim is to raise its payout every year. Here's a look at how big the dividend boost might be in 2018.
Drilling down into the dividend
Before the oil market downturn, ConocoPhillips would increase its payout at least every other year, often boosting it by a double-digit rate. However, after resetting the dividend in 2016, the company planned to increase it at a sustainable rate every year. It did that last year by raising it 6% as its turnaround plan started bearing fruit. At its current level, the stock yields 1.8%, which roughly matches that of the S&P 500. For a company that has historically paid a well above-average yielding dividend, today's payout isn't all that attractive to income seekers, especially when considering its exposure to volatile oil prices.
That said, one reason the yield is at an unappealing level is that ConocoPhillips' stock has been on fire. It's up nearly 9% already this year and almost 40% in the last six months thanks to a combination of surging crude prices and the company's stock repurchase program. Because of that rise, the yield has fallen from its roughly 2.25% perch during much of the previous year.
Where does it grow from here?
While ConocoPhillips hasn't given specific guidance on how much it will increase its dividend, it has provided some clues. Last fall, it outlined its latest three-year operating plan based on oil averaging $50 a barrel. At that level, the company would generate enough cash flow to pay a growing dividend, repurchase shares, retire debt, and increase production at a 5% compound annual growth rate. Furthermore, it planned to target growth that would expand margins by another 5%, resulting in a forecast that cash flow would increase at a more than 10% compound annual growth rate.
Given those expectations, ConocoPhillips could go one of several ways with the dividend increase. It might choose the conservative route and hike its payout along with production, suggesting a 5% bump in 2018. On the other hand, it could pace its increases with projected cash flow growth, which would imply a 10% boost this year. A third option would be to increase it with the growth in cash flow per share, which would take into account the impact of its stock repurchase program. With a plan to buy back $1.5 billion in stock per year, the company could reduce its share count by 2% annually at the current stock price, potentially enabling it to jack up its payout at a low-double-digit rate.
Don't get your hopes up banking on a big boost
While ConocoPhillips could increase its payout rate by double digits this year, that doesn't seem likely given what CEO Ryan Lance said about the dividend at its investors day last fall.
So we want a dividend that's sustainable long-term, it's growable on an annual basis. You saw what we did last year when we raised the dividend. You should expect that from us on a constant basis, but not trying to go back to a place where we were a couple of years ago with the fixed cost of the company being that high.
Those comments make it look like the company would rather target a mid- to upper single-digit annual increase instead of aiming too high with a faster growth rate that it might not be able to maintain. If it does indeed go that route, that would only push its yield up marginally above the market's average. Unfortunately, that wouldn't bolster the stock's appeal to income seekers, especially when there are much higher-paying options available in the oil patch.