Devon Energy (DVN 0.53%) launched the oil industry's first fixed-plus variable dividend framework a few years ago. Since then, the payout has been as advertised. The company has paid a fixed base dividend that has increased over the past few years. It has also made variable dividend payments that have varied considerably from quarter to quarter.
Unfortunately for income-focused investors, the variability has been to the downside in recent quarters. That decline continued in the most recent quarter as Devon's latest dividend is its lowest since late 2021. That steady drop might have investors wondering if it's time to get off this income gravy train before it runs out of fuel. Here's a look at what's driving the decline and whether that's a reason to sell.
Drilling down into Devon Energy's latest dividend
Devon Energy recently declared its latest dividend based on its first-quarter results, which it will pay in the current quarter. It set the dividend payment at $0.72 per share. That payment was the $0.20 per share quarterly base dividend and a $0.52 per share variable payment. Also of note, the variable dividend comprised a $0.11 per share benefit from divesture contingency payments received in the quarter, which isn't recurring.
Here's how it stacks up to the company's recent quarterly payments:
Data source: Devon Energy. Chart by the author.
As that chart showcases, Devon Energy's dividend has declined for three quarters. This quarter's payment level is significantly below its peak in last year's third quarter and the company's lowest total dividend since the third quarter payment of 2021.
However, it's not all bad news. Annualized, the most recent payment rate puts Devon Energy's dividend yield at 5.6% at its current share price of around $51. That's an attractive income stream as it's well above the S&P 500's average of 1.7%.
What's ahead for Devon Energy's dividend?
In the near term, Devon Energy's dividend will likely continue declining. For starters, oil prices remain under pressure. WTI, the primary U.S. oil price benchmark, averaged $76.17 per barrel in the first quarter after averaging $82.53 in the fourth quarter. While WTI initially rebounded into the low $80s in early April following a surprise production cut by OPEC+, it has resumed its decent. WTI was recently around $72.50 a barrel and briefly dipped below $70. That will impact Devon's oil-fueled cash flow, giving it less money to pay dividends in the second quarter unless crude rallies.
In addition, Deven earns and receives divestiture contingency payments annually, so it won't get another one in the second quarter. Meanwhile, the payment for its Barnett Shale sale started in 2021 and has a four-year term, meaning it runs out next year.
However, there's reason to be optimistic that Devon Energy's dividend could reverse its slide in the future. The International Energy Agency (IEA) expects oil demand to grow by 2 million barrels per day (BPD) this year, reaching a record 101.9 million BPD, fueled by rebounding jet fuel and Chinese demand. Meanwhile, the production cuts by OPEC+ will impact supplies later this year. The IEA believes there will be a significant gap between supply and demand in the second half of this year, which could boost oil prices. Higher oil prices would bolster Devon Energy's free cash flow, half of which it would pay out via its variable dividend framework.
Meanwhile, Devon is using a significant portion of the free cash flow it retains to repurchase shares. It has spent $692 million on share repurchases already this year. The company recently increased its share repurchase authorization by 50%, boosting it to $3 billion, enough to retire 9% of its outstanding stock. As Devon buys back shares, it will pay out future variable dividends across fewer shares, increasing the per-share total.
Devon's dividend is doing what it's supposed to do
Devon Energy's variable dividend ebbs and flows with its oil-fueled cash flows. The payment surged with oil prices early last year but has declined along with crude prices in recent quarters. While that downward trend will likely continue through at least the next quarter, the payment has upside potential to higher crude prices.
That variability isn't for everyone. However, Devon is an enticing option for investors seeking a higher-octane income stream.
