Devon Energy (DVN +0.97%) is a trendsetter among dividend stocks. The oil producer launched that industry's first fixed-plus-variable dividend framework in 2021 following its merger with WPX Energy. It pays a base dividend it can sustain at lower oil prices and a variable payout that fluctuates with its oil-fueled cash flows.
After paying a gusher of dividends in 2022 due to higher oil prices, Devon Energy's total dividend outlay fell last year as crude prices cooled off. Here's a look at what direction the oil stock's dividend might head in 2024.
NYSE: DVN
Key Data Points
Falling with its cash flow in 2023
Devon Energy paid a total of $2.87 per share in dividends last year. That was down from $5.17 per share in 2022 due to much lower variable dividend payments:
Data source: Devon Energy.
As that chart shows, Devon paid a base quarterly dividend of $0.20 per share last year. That was an increase of 11% from the level of its fixed payment in 2022. On top of that, Devon paid a total of $2.07 per share in variable dividends last year. That was down from $4.49 per share in variable dividends the prior year.
Two issues affected Devon Energy's ability to pay variable dividends last year: falling oil prices and rising capital expenses. Those factors weighed on Devon's free cash flow. Devon produced $1.8 billion in cumulative free cash flow through the third quarter of last year. That compared to $1.1 billion in the fourth quarter of 2022 and nearly $1.5 billion in the third quarter of that year. With its free cash flow retreating, Devon had less money to pay in variable dividends last year.
What's the outlook for Devon Energy's dividend in 2024?
Devon Energy provided an initial glimpse at its 2024 outlook when it reported its third-quarter results last year. The company expects its capital spending to decline by about 10% in 2024 as it focuses on its highest-return regions. That drives Devon Energy's view that it could produce $3.2 billion in free cash flow this year, a roughly 20% increase from 2023. That rising free cash flow suggests that Devon could pay a higher dividend this year.
However, there are a couple of caveats. First, Devon's forecast assumes that oil will average about $80 a barrel this year. That price point seemed conservative a few months ago, as crude was above that level in early November. Unfortunately for Devon, crude oil has cooled off and was recently closer to $70 a barrel. If oil remains at its current level (or keeps falling), Devon's cash flow might not grow as expected this year.
The other potential factor impacting Devon's dividend is a change in its capital allocation strategy. Devon had set a target of paying up to 50% of its post-base dividend excess free cash flow in variable dividends each quarter. That was part of its aim to return up to 70% of its total free cash flow to shareholders through dividends and share repurchases. However, Devon Energy expects to prioritize share repurchases in the near term, given the nearly 30% decline in its share price over the past year. Because of that, it might pay out a lower percentage of its free cash flow in variable dividends in 2024 if its share price stays low.
On a more positive note, Devon does expect to continue increasing its fixed base payment in 2024. Still, with oil prices under pressure to start the year and Devon prioritizing repurchases over variable dividends, its total dividend outlay could decline again in 2024.
Devon might not have the fuel to increase its payout this year
Devon Energy's declining cash flow caused its dividend to sputter last year. While the company had hoped that cash flow would improve in 2024, falling crude prices could continue to weigh on its cash flow this year. Because of that and a preference for repurchases, Devon Energy might not have enough gas in the tank to rev up its dividend in 2024 (even though it will continue to increase its base payment).
