ConocoPhillips (COP -0.43%) has come a long way over the past few years. The energy company, like most of its peers, was ill-equipped to handle the sudden downdraft in crude prices in 2014, which eventually forced the company to slash its dividend. However, it has taken several steps since then to reduce costs and fortify its financial foundation. It now has one of the best balance sheets in the oil patch, including a cash position that's on track to top $10 billion.
That cash-rich balance sheet puts the company's 3.1%-yielding dividend on one of the firmest foundations in the oil sector. It's one of many factors that make it an ideal stock for retirees to consider owning.
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Drilling down into ConocoPhillips financial profile
Before oil prices crashed, ConocoPhillips needed crude to be around $75 a barrel to support its operations as well as finance its dividend. However, thanks to resetting the payout in 2016, its cost-cutting initiatives, and a string of asset sales, the company has significantly reduced its oil price breakeven level. It can now produce enough cash at $40 oil to maintain its current production pace and pay its dividend, which it has since increased by 68% from the bottom. It can then use the cash it generates at higher oil prices to grow its production and repurchase its stock.
With oil spending much of the first half of this year around $60 a barrel, ConocoPhillips generated $6.4 billion in cash from operations. That was enough money to more than fully finance its growth-focused investments ($3.4 billion), dividends ($700 million), and share repurchase program ($2 billion). That means its cash position increased from $6.4 billion to start the year to $6.9 billion at the end of the second quarter thanks in part to asset sales.
That cash position is on pace to continue expanding. That's because the company closed the sale of its UK assets last month for $2.675 billion. Further, it recently agreed to sell its Australia-West business for $1.39 billion in a deal that should close by the first quarter of next year. Add to that the fact that oil is currently in the mid-$50s, and the company's operations should continue generating more cash than it needs to support its investment spending and dividend. That will leave it with money to buy back more shares.
Charting a long-term dividend growth plan
ConocoPhillips' success in reducing costs has the company in a position to generate even more free cash flow in the future. That's why it recently boosted its dividend by 38% -- about a $500 million annual increase -- while authorizing an additional $3 billion in share repurchases for 2020. That dividend increase probably won't be the last.
The company is currently developing a 10-year operating plan that will set the company on a course to continue growing free cash flow at even lower oil prices. That will provide it with more funds to return to investors through a growing dividend and consistently meaningful share repurchase program. The buyback program is worth noting, since it will reduce the company's outstanding shares. As a result, the per-share dividend will grow at a faster pace than the total amount of cash it pays out to investors.
Meanwhile, the company's massive cash position will help insulate it from a prolonged slump in oil prices. ConocoPhillips can use those funds to help bridge the gap so that it can keep paying its dividend, repurchase shares, and invest in expansion-related initiatives until oil stabilizes.
A low-risk oil-fueled dividend
ConocoPhillips has built up a massive cash position thanks to a series of asset sales that have also helped reduce its operating costs. It's positioned to prosper in nearly any oil market environment. That will enable the company to continue increasing its already above-average dividend in the coming years, making it a potentially appealing option for income-seeking retirees to consider owning.
