Pioneer Natural Resources (PXD -0.13%) might not look like an attractive dividend stock at first glance. The oil company currently offers a dividend yield of around 1.1%, below the S&P 500's 1.4% dividend yield. However, that doesn't tell the whole story.
The oil company has an innovative framework that could see it pay enormous dividends this year. That income upside makes it a much more attractive option for dividend investors.
A cash flow producing and returning machine
Pioneer Natural Resources recently reported its fourth-quarter results. The oil company generated $1.1 billion of free cash flow in the quarter, pushing its full-year total to a record $3.2 billion. The company benefited from higher production -- output was in the upper end of its guidance range in the fourth quarter -- and strong oil pricing, realizing an average of $76.38 per barrel of oil produced in the period.
The company opted to return the bulk of that windfall to shareholders. After funding the quarterly base dividends and its capital program, it accelerated its variable dividend program, which sees it pay out up to 75% of its excess free cash flow in dividends to shareholders each quarter. As a result, the company returned $1.9 billion in cash to investors last year through its base dividend, variable dividend, and share repurchase program. The bulk of that came in the fourth quarter when it returned 101% of its free cash flow, driven in part by $250 million in share repurchases.
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An even bigger dividend gusher is coming
Pioneer Natural Resources sees the potential to return even more cash to shareholders this year. It has already increased its base quarterly dividend by 25% to $0.78 per share each quarter, pushing the dividend yield to around the S&P 500's average. That continues the rapid ascent in the base dividend, which Pioneer has increased at a nearly 90% compound annual rate over the last six years off a low starting point. In addition, it declared a $3 per share variable dividend payment. The combined payout implies a 7% annualized dividend yield.
However, given that oil prices are currently above $90 a barrel, Pioneer Natural Resources should produce even more free cash flow this year. The oil company therefore sees the potential of paying out in excess of $20 in dividend income per share this year. That's about three times what it paid out last year and implies the potential for a yield of around 10%. Meanwhile, if oil prices continue rising, Pioneer's variable dividend payment would follow them higher. At $100 oil, its dividend payments would total a roughly 12% yield at the recent share price.
Pioneer Natural Resources also plans to return additional cash to investors through its share repurchase program. It recently launched a new $4 billion repurchase authorization. That replaces the previous plan that saw the company buy back $1.2 billion of its stock over the past few years.
Meanwhile, Pioneer Natural Resources will retain whatever cash it doesn't pay out to enhance its already top-tier balance sheet. It ended 2021 with $3.8 billion of cash and $3.1 billion of net debt. That gives it an industry-leading balance sheet with an ultra-low leverage ratio. Because Pioneer has such a strong balance sheet, it plans to return roughly 80% of its excess free cash flow to shareholders in 2022 through dividends and share repurchases.
A cash gushing machine
Pioneer Natural Resources could produce a massive amount of cash this year, given where oil prices are these days. While it will use some of that money to grow its production and strengthen its already top-tier balance sheet, it aims to return the bulk of that windfall to shareholders. It offers dividend investors a unique opportunity to collect a massive passive income stream this year.
