Oil companies have a spotty track record when it comes to distributing dividends. Those payouts were among the first things to go when crude prices began crashing in 2014. Many producers slashed or eliminated them so that they could conserve cash to get through one of the deepest downturns in decades. Others simply stopped growing their payouts. Those decisions bought them some time to work on other ways to reduce costs, such as selling assets to pay down debt.
Those initiatives are starting to pay off now that oil prices are on the upswing. As a result, oil companies are generating boatloads of cash, which they're increasingly returning to their investors.
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High-octane dividend growth
EOG Resources (EOG +0.07%) was one of the few oil companies that didn't reduce its dividend during the downturn. Instead, it held its payout flat as it worked to drive out other costs and boost drilling returns. Those efforts have positioned the driller to produce an increasing supply of cash flow that it's starting to return to investors through a much higher dividend.
EOG Resources initially bumped up its dividend by 10% in February 2018 and followed that up with another 19% increase last August, good for a 31% boost overall. The company has since increased its payout by an additional 31% this year, bringing the total growth over the past two years to 72%.
More increases are probably on the way, given EOG's stated aim to grow the dividend at a more than 19% compound annual rate. That's in part because the company isn't joining its peers in buying back stock. Instead, dividends will probably be the primary method it uses to return cash to investors unless its stock falls to a level where buybacks make sense.
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Putting a priority on growing the payout
Pioneer Natural Resources (PXD +0.00%) also maintained its dividend during the oil market downturn. Though at a paltry yield of less than 0.1%, the payout didn't cost very much. However, that has changed in recent years. The company introduced a step change in its dividend in February of 2018 by boosting it 300%. The driller doubled its payout again earlier this year, bringing the total increase to 700% since the beginning of 2018.
The company plans to increase its dividend again, aiming to pay out $1.50 to $1.75 per share each year, up from the current rate of $0.64. That would boost Pioneer's dividend yield up to its new targeted level of around 1% of the share price, light-years above its microscopic yield in recent years.
Diamondback Energy (FANG +0.84%), meanwhile, just started paying a dividend last year. However, it has already increased it 50% for 2019, which implies a 0.7% yield at the current share price. That fast-paced dividend growth should continue given that Diamondback aims to return the majority of its growing free cash flow to investors and sees its dividend as the primary way to accomplish that goal. However, the company did recently authorize a $2 billion share repurchase program -- matching a similar plan by Pioneer Natural Resources -- so the dividend isn't the only capital return method Diamondback intends on using.
Devon Energy (DVN +0.54%), on the other hand, was among the many oil companies that reduced its payout during the downturn, slashing its dividend a staggering 75% in early 2016. However, Devon has started building it back up in recent years. The company boosted it 33% last year and has increased it by another 13% in 2019. That trend should continue, given Devon's goal of generating free cash and returning it to shareholders.
More oil companies will likely increase their dividends this year. Not only have oil prices improved but oil producers are getting much more efficient at drilling wells in the U.S., which means they don't need as much cash to produce the same amount of oil. That's freeing up this capital for other things, including boosting the payout.
Expect the dividend growth train to continue rolling
The oil industry hasn't had the best track record when it comes to paying dividends. However, it's working to improve that image by rapidly increasing shareholder payouts. That makes the sector one that dividend growth investors won't want to overlook.
