What happened
Share of Devon Energy (DVN +1.46%) hugely underperformed the broader market in the first half of 2023, falling 21.4% according to data provided by S&P Global Market Intelligence. The S&P 500 index, meanwhile, gained 15.9%.
Investors in the oil stock were a happy lot in 2022, when the company's cash flows and dividends surged upward due to high crude oil prices. That started to change from the fourth quarter onwards, and the stock's appeal faded as its dividends fell. That said, this offbeat oil stock can still pay massive dividends to shareholders once oil prices start to recover.
So what
Devon Energy is one of the largest producers of oil and natural gas in the U.S. Like most upstream energy companies, Devon pays a dividend. But unlike many companies, it does not attempt to keep those payouts fairly steady or gradually rising. Instead, it uses a fixed-plus-variable dividend framework: It sets a fixed base dividend for each year that is firm, and on top of that pays out a variable dividend each quarter amounting to up to 50% of the excess cash flow remaining from the period after funding the fixed dividend.
As such, Devon's dividend payouts fluctuate quarterly -- often quite widely -- in line with its cash flows. When oil prices are high, shareholders receive big, fat dividend checks. When crude prices decline, those payouts can plunge.
NYSE: DVN
Key Data Points
In 2022, when oil prices were high for the better part of the year, Devon's total dividend payout hit a record high of $5.17 per share. That was significantly higher than its 2021 payout of $1.97 a share.
2023, however, has gotten off to a slow start. Devon's quarterly payout has fallen consistently for three quarters now because of lower crude oil prices and cash flows. The company paid out a total dividend of only $1.61 per share in the first two quarters of 2023.
Investors, of course, weren't happy with those falling dividends, and some have cashed out of the stock in recent months.
Now what
Those who sold off Devon shares in the first half of 2023 ignored the fact that even amid the volatility, Devon still increased the fixed portion of its dividend by 11% this year. The energy giant's oil production also hit an all-time high in the first quarter.
That's not all. In the wake of Devon's share price decline, management wasted no time and bought back shares in a big way. Viewing the stock as undervalued, management boosted its share repurchase program by 50% to $3 billion in Q1 in a bid to return more value to shareholders.
In other words, Devon Energy is a financially strong company that prioritizes shareholder returns, making it the kind of stock one buys for keeps, not one you should want to sell just because its dividends fluctuate. If oil prices head significantly higher in the second half of 2023 -- as many predict will happen -- Devon's dividends will go up again, and that alone could help this 8.8%-yielding oil stock rebound from its declines so far this year.
