Devon Energy (DVN -0.89%) is a U.S. focused energy producer with a unique way of returning value to investors. When things are going well it can be a wonderful stock to own, but when the highly cyclical energy industry turns south, the shares are likely to plunge. This is not a stock for the faint of heart. But for the right investor, it could be a perfect portfolio addition.
Here's why some investors will definitely find Devon Energy worth the trouble.
A different model
Most companies try to set their dividends at a sustainable level, with increases backed by structural business growth that can support an ongoing higher payment. Devon Energy tosses that out the window, largely because the energy sector in which it operates is highly cyclical. The company's variable dividend is specifically built to go up when the company is performing well and to fall when times are tough. If you are looking for consistency, you will not like Devon Energy.
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And yet there's something simple and logical about the dividend approach here. When times are good, investors get rewarded with larger dividend payments, and when times are not good, they get less. In effect, shareholders share in the company's performance. That said, there's a base dividend that management believes is sustainable over time, so investors should expect to get something even when energy prices are weak. It is the variable component that will change. And Devon Energy is a generally well-respected oil company, which has paid a dividend of some sort for 30 consecutive years.
The good and the bad
Given the often dramatic price swings in the energy sector, meanwhile, good years can be very good for shareholders. To put a number on that, the full-year dividend in 2022 was $5.17 per share, up from $1.97 in 2021 and $0.68 in 2020. That's a notable progression, but 2020 was the last major industry downturn, driven by reduced demand as governments around the world effectively shut their economies to slow the spread of the coronavirus.
That said, in 2022 the company's dividend topped out in the third quarter at $1.55 per share. It was cut to $1.35 in the fourth quarter and will be just $0.89 per share in the first quarter of 2023. That's the downside of the variable dividend, and investors who buy Devon Energy simply need to accept that this was bound to happen and will happen again in the future.
There's another problem here, though, because investors tend to dislike dividend cuts. This is one of the reasons Devon Energy's share prices are down more than 20% over the past three months. A big piece of that came just recently, as it announced fourth-quarter earnings and its latest dividend cut. You have to go in expecting this kind of price volatility.
Who should own it
As already noted, investors looking for consistent dividends should avoid Devon Energy. But that doesn't mean it has no place in any portfolio. If you are looking for a hedge against rising energy prices, for example, Devon Energy's dividend will likely be rising as you are facing higher prices at the pump. That would mean extra cash to fill the tank just when you most need it. As part of a broadly diversified portfolio, that could actually be a nice addition -- if you understand the dividend policy and its implications.
There's one other type of investor that might appreciate Devon Energy, as well. If you have a strong conviction about the direction of energy prices, this stock will likely end up leveraged to the ups and downs. That's probably more aggressive than most investors should be, but there will be those who appreciate this kind of higher-risk option.
