EOG Resources (EOG +2.29%) has an excellent record of paying dividends. The oil and gas producer has delivered 27 years of sustainable and growing dividends. While the company hasn't increased its payout every single year since its initial public offering, it has never reduced its payment, which is a rarity in the oil patch.
Further, it has grown its payout twice as fast as its peers since 2019. On top of that, EOG has paid several special dividends in recent years.
The oil stock recently added a lot more fuel to its dividend growth engine. It's buying Encino Acquisition Partners in a $5.6 billion deal that's so accretive that EOG is boosting its dividend payment by another 5%. That will further increase its already attractive yield of over 3.5%, more than double the S&P 500's (^GSPC 0.93%) 1.3% dividend yield.
Here's a closer look at the deal and why dividend investors should consider adding EOG Resources' high-octane payout to their income portfolio.
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Adding more low-cost oil and gas to its portfolio
EOG Resources is one of the country's largest oil and gas producers. It has a multi-basin portfolio loaded with low-cost resources. The company estimates that it currently has over 10 billion barrels of oil equivalent (BOE) resources that it can tap into in the coming years.
The oil and gas producer has largely built its resource portfolio via organic exploration. Unlike others in the oil patch, EOG Resources prefers not to make corporate acquisitions because those tend to be more expensive. However, it will pounce on a deal when the right opportunity arises.
That recently happened. The company has agreed to buy Encino Acquisition Partners for $5.6 billion. Encino holds over 675,000 net acres in the Utica Shale play of Ohio. That deal significantly increases EOG's position in the play, which will have a combined 1.1 million net acres with an estimated 2 billion BOE of undeveloped net resources after the transaction closes. That will give the company a third foundational resource position alongside its assets in the Delaware Basin and Eagle Ford Shale in Texas.
EOG Resources expects the deal to be immediately accretive to its financial metrics. It sees the acquisition boosting its cash flow from operations and free cash flow by 9%. Given the largely undeveloped acreage, the deal should enhance the company's ability to grow its production in the coming years.
NYSE: EOG
Key Data Points
A rock-solid, dividend-paying machine
EOG Resources is using its strong balance sheet to fund this deal. It's utilizing $2.1 billion of cash on hand and plans to issue $3.5 billion of new debt.
The company has spent the past several years building a fortress balance sheet. It ended the first quarter with $6.6 billion in cash and only $4.7 billion in debt. After closing the deal and adjusting for a recent $500 million debt repayment at maturity and a $275 million bolt-on acquisition in the Eagle Ford, EOG will have $3.7 billion in cash against $7.7 billion of debt.
That's still a very strong financial position. Even if oil prices fell to $45 per barrel, EOG's leverage ratio would be less than 1 times.
As mentioned, the deal is so accretive to the company's cash flow that EOG Resources is bumping its dividend payment by another 5% per share. That's on top of the 7% raise the company provided investors earlier this year.
The company's dividend payment should continue growing in the future. EOG's top priority for its cash flow is to pay a sustainable and regular dividend. Dividends are the company's primary mode of returning cash to shareholders (over share repurchases). It aims to pay a competitive dividend compared to its peer group and the broader market.
EOG's other cash flow priorities are to maintain a strong balance sheet (which it will have after closing this deal), invest capital to grow its business (targeting 5% production growth this year before factoring in the Encino deal), and return additional cash to shareholders. Given the strength of its balance sheet, EOG has the capacity to return over 100% of its annual free cash flow to shareholders. It does that through special dividends and opportunistic share repurchases.
EOG has focused more on repurchasing its shares ($800 million in repurchases in the first quarter) due to its currently attractive share price (down 20% from its 52-week high). Those repurchases help steadily reduce its shares outstanding (down 6% over the past three years), which enhances its ability to increase its dividends per share.
A well-oiled dividend growth stock
EOG Resources has an excellent record of paying dividends. It should have plenty of fuel to continue growing its high-yielding payout, especially after buying Encino. Because of that, it's a great dividend stock to consider adding to your income portfolio right now.
