Most companies pay a fixed quarterly dividend to give their investors visibility into their income. However, some companies have found that paying a fixed dividend doesn't work for their business models because their cash flows vary. That has led them to institute variable dividends that better align their payouts with cash flows.
One of the drawbacks of variable dividends is that they decline with a company's cash flows. That has been the case for Blackstone (BX -0.03%) and Devon Energy (DVN 0.19%) this year. However, those payouts could reverse course and rocket higher next year. Here's what could give them the fuel to rebound.
A better credit market could boost Blackstone's performance revenue
Blackstone has two revenue sources. The leading alternative asset manager generates recurring fee-related earnings from management and advisory fees. In addition, it records performance revenue as the investment funds it manages realize returns by monetizing investments. Those realizations can be lumpy, depending on market conditions.
Because of that, Blackstone pays a variable dividend. Over the last 12 months, Blackstone has paid $3.42 per share in dividends, giving it a 3.3% dividend yield at the recent share price. That's down from its peak:
Data source: Blackstone: Chart by the author. Note: Blackstone has only declared three dividends so far in 2023.
As that chart showcases, Blackstone's dividend has varied significantly. However, it has grown overall in the past decade.
The main reason Blackstone's dividend is down this year is lower performance revenue. Its fee-related earnings have risen 1% to nearly $2.2 billion, while net performance revenue has tumbled 74% to $592 million, causing distributable earnings to slide 37% to about $2.5 billion.
That decline in net performance revenue could reverse next year. Blackstone has accrued about $6.5 billion, or $5.31 per share, of net performance revenue it has yet to realize, primarily in its private equity and real estate funds. A more stable interest rate environment (which many expect in 2024) could give the company more opportunities to realize some of those investments, allowing it to capture this performance revenue. That would boost its distributable earnings, enabling Blackstone to potentially pay a much higher dividend in 2024.
A trio of catalysts could fuel higher cash flows for Devon Energy
As an oil and gas producer, Devon Energy's cash flows rise and fall with oil prices. That variability led the company to institute the industry's first fixed-plus-variable dividend framework a few years ago. Devon pays a fixed quarterly dividend that it can sustain at lower oil prices. In addition, it pays up to half its post-base-dividend free cash flow in variable dividends each quarter. The variable portion of Devon's payout has lived up to its name:
Data source: Devon Energy. Chart by the author.
Devon Energy's variable dividend rode the wave of oil prices higher last year before cascading downward with crude in 2023. However, even if we annualized the most recent payment, Devon still offers an attractive yield of 3.9%.
That downward trend could reverse course in 2024, fueled by a trio of catalysts. The big one is oil prices, which have started rebounding after getting stuck in a range of $65 to $80 a barrel over the past few quarters. Crude was recently over $80 a barrel, which could become the new floor. Strong demand and limited supplies should support oil in the range of $80 to $100 a barrel for the foreseeable future.
Meanwhile, Devon is putting itself in a better position to capitalize on higher oil prices by growing its production. Its oil output has risen 8% over the past year, driven by acquisitions and newly drilled wells. It expects production to continue growing as it develops its oil-rich resource base.
Finally, service cost inflation, which put additional downward pressure on Devon's cash flows this year, is starting to fade. On its second-quarter conference call, the company noted that service costs are beginning to deflate as it renews contracts. The driver is lower activity levels from natural gas-focused companies and private producers, which have pulled back due to lower pricing.
The combination of higher oil prices, rising production, and lower service costs could drive meaningful free cash flow growth for Devon in 2024. That would give it a lot more money to pay variable dividends.
Their already attractive payouts appear poised to surge
Despite trending lower this year, Blackstone and Devon still offer attractive dividends as their yields are more than double the S&P 500 index (currently around 1.5%). Meanwhile, those payouts could be much higher next year as improving market conditions boost their earnings and cash flow. That makes them compelling stocks to consider for investors seeking dividends with big-time near-term upside potential.
