An Oil-Fueled Dividend
In 2021, Devon Energy introduced the oil industry’s first fixed-plus-variable dividend framework following its merger with WPX Energy. This combined company anticipated higher free cash flow, which it aimed to distribute among shareholders. The dividend structure included a fixed base dividend and a variable dividend comprising at least 50% of the excess free cash flow.
The chart showcasing Devon’s dividend reveals that it rose in tandem with the company’s oil-related cash flow in the early months of 2022. However, it experienced a decline alongside oil prices in recent quarters, before rebounding in the most recent period.
It’s important to note that Devon’s dividend is likely to fluctuate going forward. In the near term, it may decrease due to the company’s adjusted capital return strategy for 2024.
Devon Energy’s CEO, Rick Muncrief, stated on the third-quarter conference call that, given the stock’s decline in price (approximately 35% below its 52-week high), the company plans to pursue buybacks at a level that will likely result in the variable payout falling below the 50% threshold. This strategy aims to capitalize on the attractive trading levels and exceptional value offered by its equity. Consequently, the dividends may not have as much upside potential in 2024.
The Dividend Aligned with Earnings at Blackstone
Blackstone has been paying a variable dividend for a considerable period. As a leading alternative-asset manager, the company distributes almost all of its distributable earnings to investors through quarterly dividends and share repurchases.
Over the years, Blackstone’s dividend has fluctuated, but the overall trend has been upward. Despite a challenging year in 2023, the dividend has experienced a remarkable surge of over 500% in the past decade.
Blackstone’s distributable earnings have grown at an impressive 20% annual rate over the last decade, more than twice the rate of the broader market. This robust growth empowers the company to offer higher dividends. CEO Steve Schwarzman expressed confidence in Blackstone’s ability to capture future growth opportunities in the alternatives area, which is still in its early stages of development. Blackstone has been at the forefront of the industry’s evolution and aims to maintain its industry-leading position in the future.
Recognizing numerous growth opportunities, such as expanding its private credit platform, insurance solutions business, and offerings for individual investors, Blackstone anticipates its earnings to continue growing, consequently driving dividend growth as well.
An Extra Payment to Enhance Returns at CME Group
CME Group follows a different dividend approach. The exchange operator pays a fixed quarterly dividend, which it incrementally increases each year. Additionally, since 2012, it has made an annual variable dividend payment to distribute excess cash to shareholders.
The amount of this annual dividend payment varies based on CME Group’s operating results, potential investment activity, and other factors related to capital return, such as share repurchases.
CME Group is well-positioned for further growth, thanks to its diverse businesses and ongoing growth initiatives. With this advantageous standing, the company plans to continue raising its base dividend (already increased by 10% in early 2023) and making substantial variable dividend payments at the end of each fiscal year.
Fixed dividend payments are favored by many investors due to the stability they provide, ensuring a predictable annual income stream. However, for those looking for additional income upside potential, stocks like Devon Energy, Blackstone, and CME Group offer an appealing proposition. While these companies’ dividends can vary from year to year, the general trajectory has been upward over the long term.