Devon Energy (NYSE:DVN), Speed ​​Energy (NYSE:VTS)And Diamondback Energy (NASDAQ:FANG) are all high-yielding energy stocks with excellent growth prospects. While it’s never a good idea to go all-in on just one sector (unless you have a solid view on the price of oil), these three stocks offer good options as part of a diversified and flexible portfolio. search for income.
Money gushing out
It’s no secret: given current valuations, the market is not in love with energy stocks. Highly cyclical stocks often appear undervalued due to market prices and the inherent volatility of their earnings, which depend on oil prices. That said, if you take an agnostic view and envision an oil price similar to the current price, then these three stocks appear to offer excellent value.
Wall Street analysts generally follow this approach and rarely deviate from the assumption that the current price of oil will not prevail over the long term. As is free movement of capital (FCF) and the FCF-to-market cap ratio (free cash flow yield) reflect the current price of oil and its impact on revenue, earnings and cash flow.
All of this is a long-winded way of saying: don’t look at this chart without understanding that the numbers it contains are subject to significant revisions depending on the direction of the oil price. Still, there’s no doubt that the shares represent good value.
Business | TTM dividend yield | FCF 2024 | FCF yield 2024 | FCF 2025 | FCF yield 2025 |
|---|---|---|---|---|---|
Devon Energy | 4.1% | $3.3 billion | 10.5% | $3.2 billion | 10.3% |
Speed ​​Energy | 8.8% | $45 million | 6.4% | $82 million | 11.6% |
Diamondback Energy | 4.7% | $3.2 billion | 8.5% | $5.8 billion | 9.2% |
Data sources: marketscreener.com, author’s analysis. TTM = last 12 months.
Free cash flow and business development
I used FCF because most companies base their capital allocation strategies on it. Additionally, looking at FCF, it is easy to see that the underlying potential for all three companies to pay a dividend is even better than their dividend yield over the last 12 months suggests.
In theory, all three could return the entire FCF to investors in the form of dividends. However, in reality, businesses also use cash in a variety of other ways, including:
Pay down debt (which reduces interest payments and improves future FCF generation).
Share repurchase (which reduces the number of shares and increases shareholders’ claim on future FCF).
Support asset acquisitions (which will add FCF).
These considerations directly address all three companies in 2024.
Devon Energy
Devon Energy’s capital allocation plan for 2024 is to use 30% of FCF to pay down debt and return the remaining 70% to shareholders through buybacks and dividends. However, its management believes its stock is undervalued and is prioritizing share buybacks this year.
The company pays a fixed dividend of $0.22 per quarter, and after that, the remaining FCF can be devoted to either stock buybacks or a variable dividend. Management decided to use $205 million for share repurchases in the first quarter, compared to only $82 million for the variable dividend ($0.13 per share). Annualizing the total first quarter dividend of $0.35 leads to a dividend yield of 2.8% at the current stock price. This might disappoint some investors, but stock buybacks reduce the number of shares. As you can see in the table above, Devon Energy has ample potential to increase its variable dividend in 2025.
Speed ​​Energy
Vitesse Energy is focused on its $0.525 fixed dividend (an annualized dividend yield of 8.8%) while investing in development assets in North Dakota. He also authorized a $60 million stock buyback program.
The North Dakota asset acquisitions led management to raise its 2024 production forecast to a range of 13,000 barrels of oil equivalent (boe/d) to 14,000 boe/d, up from a previous estimate of 12,500 boe/d /d to 13,500 boe/d. However, the acquisitions also caused management to increase the midpoint of its capital spending guidance by $40 million, directly eating into 2024 FCF.
With the new assets added to production in 2025, Vitesse is poised to increase its free cash flow, making its current dividend easily sustainable.
Diamondback Energy
The company’s main priority is to complete its merger with privately held Endeavor Energy Resources in the fourth quarter of 2024. As noted in the deal announcement, the deal is expected to result in “significant pro forma cash flow and an increase in free cash flow per share. “
However, the need to reduce debt following the deal means Diamondback “has reduced our future capital repayment commitment to at least 50% of free cash flow, down from at least 75% previously,” according to a letter from the CEO Travis Stice to investors. .
Diamondback spent $42 million on share repurchases in the first quarter. However, there were none in the second quarter, until the end of April. It will distribute $0.90 per share in its base dividend and $1.07 in its variable dividend, for a total quarterly dividend of $1.97. Annualized, this produces a dividend yield of 4% at current prices. This is an excellent return under the circumstances.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool posts and recommends Vitesse Energy. The Motley Fool has a disclosure policy.
These 3 High-Yielding Dividend Stocks Generate Cash was originally published by The Motley Fool
