Devon Energy's Strategic Shift Towards Share Repurchases

The dividend's downward trend

Devon Energy recently reported its first-quarter results and declared its latest dividend payment. The company is paying $0.35 per share in dividends, consisting of a $0.22 per share base dividend (which it increased by 10% earlier this year) and a $0.13 per share variable dividend. That combined payout was near Devon's lowest level since it launched the new framework in 2021.

Data source: Devon Energy. Chart by the author.

Devon Energy's most recent combined dividend payment cost the company $225 million ($143 million fixed and $82 million variable). It easily covered its dividend with cash flow. The company's operating cash flow totaled $1.7 billion in the quarter (up 4% from the year-ago period), while its free cash flow was $844 million after funding capital projects. That put Devon's total dividend outlay at about 27% of its free cash flow, well below its former target of paying at least 50% of its excess free cash flow in variable dividends (and that was after paying its fixed quarterly dividend).

• The company made the strategic decision to use more of its free cash flow to prioritize share repurchases and improve its balance sheet in 2024.
• It repurchased $205 million in shares during the first quarter.

Capitalizing on the situation

Devon Energy has shifted its capital return focus to share repurchases because the stock trades at a very compelling level compared to the broader market. It trades at a 9% free cash flow yield, assuming oil averages $80 a barrel this year (around the recent level). That's three times higher than the Nasdaq (3% free cash flow yield) and more than double the S&P 500 (4%), implying it's significantly cheaper than those broad market indexes.

That's not unique to Devon Energy. Energy companies currently contribute about 10% of the S&P 500's earnings. However, the sector only makes up about 4% of that broad market index. That's well below the historical average of a little more than 10%.