In the first quarter of 2022, ConocoPhillips (COP +0.26%) paid a regular dividend of $0.46 per share and announced a variable payment of $0.70 per share. Clearly, management is focused on rewarding shareholders for sticking around while energy prices are high. That's the good news. But now is probably the time to at least consider the potential for the bad news.
Leveraged to the upside
A few years ago, ConocoPhillips spun off Phillips 66, effectively jettisoning its midstream assets so that it could become a pure-play oil and natural gas producer. The move tied ConocoPhillips' fortunes solidly to the ups and downs of oil and natural gas prices. And while that has been a very good thing over the past year or so, some numbers will help explain just how good.
Image source: Getty Images.
In the first quarter of 2021, the energy company's average realized oil price was $45.36 per barrel, and it generated adjusted earnings per share of $0.69. By the end of 2021, its realized oil price was $65.56, and adjusted earnings came in at $2.27 per share. And in the first quarter of 2022, the company posted adjusted earnings per share of $3.27 on an average realized oil price of $76.99 per barrel. The year-over-year increase in the oil price in the first quarter was about 70%, and the increase in earnings was a massive 370%.
It's little wonder that the company was able to pay both its ordinary dividend and a huge variable dividend. Annualizing that payment (a combined $1.16 per share), the yield on ConocoPhillips shares is around 3.8%. And if energy prices continue to rise, the variable payment could conceivably continue to rise. If you think energy prices are going to remain elevated, ConocoPhillips could be a very attractive investment, noting it is also using its cash flow windfall today to buy back stock, reduce leverage, and invest in its business.
Leveraged to the downside
The problem with this picture is that ConocoPhillips is also leveraged to falling energy prices. For starters, the stock price has doubled over the past year, baking in a lot of the good news that's taken shape over that span. If oil prices fall, investor sentiment is highly likely to shift quickly in a negative direction in anticipation of falling earnings.
NYSE: COP
Key Data Points
Meanwhile, the yield noted above is annualizing both the regular dividend and the variable payment. If oil prices drop, as history suggests they eventually will, the variable payment will start to shrink and, perhaps, even disappear.
The yield using just the regular dividend is a far more modest 1.6% today. The variable payment policy is relatively new, and the previously noted spinoff was a big business shift, but the current 1.6% dividend yield is definitely toward the low end for ConocoPhillips, historically speaking. That suggests the stock is being afforded a premium price.
NYSE: CVX
Key Data Points
For conservative types looking for an income-producing energy play, a more diversified option might be a better choice. Chevron (CVX +1.92%), for example, is a Dividend Aristocrat with over three decades of annual dividend increases under its belt. That means it has rewarded investors with dividend increases during both good and bad energy markets.
Chevron's yield today is 3.1%. Although this integrated giant's stock price is likely to rise and fall along with oil prices, just like ConocoPhillips' price will, at least you won't have to worry about the double hit of a variable dividend getting slashed.
Play it safe or ride the big wave?
ConocoPhillips is a well-run energy company, and if you believe oil prices are going to remain elevated, definitely buy the stock. However, after such a large commodity run in the historically volatile energy niche, it might make sense for investors to shift toward a more cautious stance. Chevron and its impressive dividend history would probably be a better option for investors seeking dividend income in the energy space today.
