Warren Buffett makes a lot of money from dividend income. His company, Berkshire Hathaway (BRK.A +0.55%)(BRK.B +0.74%), collects more than $6 billion from dividends each year.
Buffett's dividend income is about to head even higher. That's after one of his largest holdings, oil giant Occidental Petroleum (OXY +0.26%), increased its dividend payment by another 38%. Here's a closer look at what's fueling Occidental's dividend increase and how it will impact Buffett's dividend income.
NYSE: OXY
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Back on a solid foundation
Occidental Petroleum has come a long way in recent years. The oil giant made an ill-timed and expensive acquisition of Anadarko Petroleum in 2019 with the help of Warren Buffett to win the bidding over oil behemoth Chevron (CVX 0.23%). That deal saddled it with a lot of debt right before oil prices collapsed in 2020. It forced the company to take several actions to stay afloat, including slashing its dividend payment by nearly 99% from $0.79 per share each quarter all the way down to $0.01 per share. The company used that cash to help chip away at its debt.
The company's debt-reduction efforts got a big boost from higher oil prices last year. Occidental generated a gusher of free cash flow, enabling it to make over $10.5 billion of debt repayments in 2022, retiring 37% of its total outstanding principal.
With its balance sheet getting back on solid ground, Occidental was also able to start returning more cash to investors. It increased the dividend by an eye-popping 1,200% early last year to $0.13 per share. Occidental was also able to repurchase $3 billion of its shares.
The company entered 2023 in a much stronger financial position. Because of that, it plans to return even more cash to investors this year. It recently launched a new $3 billion share-repurchase authorization and will increase the dividend by another 38% to $0.18 per share each quarter.
Padding Buffett's dividend income (for now)
Warren Buffett's Berkshire Hathaway reportedly owned nearly 194.4 million shares of Occidental Petroleum at the end of last year. That's 21.4% of the oil company's outstanding shares. Those shares are currently worth about $11.5 billion, making Occidental Buffett's seventh largest holding at 3.5% of Berkshire's investment portfolio.
NYSE: BRK.B
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The 38% dividend increase will provide a nice boost to Buffett's dividend income. Berkshire's nearly 195 million shares of Occidental will now generate about $140 million of annual dividend income, up from around $101 million before the dividend increase. While that pales compared to the more-than $1 billion Berkshire will collect from fellow oil stock Chevron following its 6% dividend increase this year, it's a meaningful amount of cash flow.
Furthermore, the common-stock dividend isn't Buffett's only income from Occidental. Berkshire also has a $10 billion preferred stock investment it made in 2019 to help fund the Anadarko deal. Berkshire earns an 8% yield on that investment, generating $800 million of annual income. Add in the dividend income, and Occidental will supply Buffett's company with about $940 million of cash this year, making it one of its top income producers.
However, Occidental is getting close to reaching an inflection point where it can start redeeming those preferred shares. It can begin once its cash returns to other investors (dividends plus share repurchases) are over $4 per share in a 12-month period. Cash returns were $3.78 per share over the last 12 months. As it starts redeeming the preferred shares, Occidental can reallocate the cash flow it used to pay Buffett in preferred dividends toward other things, including additional share repurchases and higher common share dividend payments, which could enhance value for all shareholders.
Great news for investors
Occidental Petroleum's latest dividend increase will boost Berkshire's income. However, it's likely a bittersweet moment for Buffett since it puts Occidental close to reaching the point where it can start redeeming the preferred stock investment. That would be highly beneficial to outside investors because it would shift cash from flowing into Berkshire to enhance value for all shareholders.
