Devon Energy (NYSE:DVN) has made adjustments to its dividend structure, as revealed in its Q2 earnings report on August 1. The company has implemented a reduction in the variable component of its dividend, which is set at 50% of adjusted free cash flow. This variable dividend has been reduced by 44%. Consequently, the total dividend, encompassing both the fixed and variable portions, has experienced a decline of 31.9%, moving from 72 cents to 49 cents. Despite these changes, Devon Energy’s stock retains an attractive annualized yield of 3.87%.
To calculate this yield, one can multiply the quarterly dividend of 49 cents by 4 and then divide the result by the current price of $50.62, resulting in $1.96/$50.62. The company’s solid prospects are further supported by the stabilization of oil and gas prices, coupled with an increase in production, which is anticipated to sustain Devon Energy’s robust free cash flow in the coming periods.
Fixed and Variable Dividend Breakdown
Illustrating this, Devon Energy (NYSE:DVN) reported an excess free cash flow (FCF) of $381 million, after covering the fixed dividend payment. With 50% of this amount allocated to the variable dividend, a payout of $186 million was possible. Given the current count of 641 million outstanding shares, the variable dividend equates to 29 cents, representing a 44% reduction from the previous quarterly dividend of 52 cents. Nonetheless, with the company’s fixed quarterly dividend set at 20 cents ($128 million), the combined quarterly dividend stands at 49 cents.
Rick Muncrief, the CEO and President of Devon Energy, highlighted that this marks the 12th consecutive quarter in which positive FCF has been generated. Additionally, the company allocated $462 million for fixed and variable dividends (based on the 72 cents variable rate) and spent $228 million on share buybacks. Consequently, total shareholder returns reached $690 million. Moving forward, the reduced dividend cost of $314 million (comprising $128 million fixed and $186 million variable dividends) and the $228 million for share buybacks will result in a total cost of shareholder returns amounting to $542 million. This 21% reduction ($542 million compared to $690 million) contributes to the increased sustainability of dividends and buybacks.
This is the driving force behind the appeal of the 3.87% dividend yield to shareholders, indicating a promising outlook for the stock in the long term.
Generating Income through Shorting Out-of-the-Money Puts
For those seeking additional income opportunities, a strategy involves selling short near-term expiration put options with out-of-the-money (OTM) strike prices. A case in point is the discussion of a similar approach in our Barchart article titled “Despite Devon Energy’s Dividend Cut, Its High Yield Still Makes It A Buy,” where the $43.00 strike price puts expiring on July 21 was shorted. These puts expired without value, resulting in a successful trade. Those who shorted the puts collected 37 cents and were not obligated to purchase the stock at $43.00.
Presently, the $47.00 strike price puts expiring on September 1 are trading at 33 cents at the midpoint. This implies that short-sellers of these puts can secure a return of 0.70% within the three-week timeframe leading up to expiration. Calculated annually, this represents an income rate of 11.9%, assuming this trade can be repeated 17 times throughout the year.
By securing approximately $4,300 in funds through their brokerage firm, a trader can initiate the process by “Selling to Open” 1 put contract at the $47.00 strike price. This would instantly credit the account with $33.00, translating to a yield on investment of 0.7%. Notably, the $47.00 strike price sits more than 7.0% below the current stock price, providing a cushion for the short-put trader in case of further stock declines. Alternatively, the $48.00 strike price offers a higher premium of 50 cents, with a narrower width of 5.4% below the present stock price. This yields a slightly higher return of 1.04% per three-week period or an annualized yield of over 17.7% when replicated over the course of a year.
In essence, Devon Energy’s stock presents an appealing dividend yield to investors, while options traders can also capitalize on favorable income prospects through out-of-the-money short-put options strategies.
Featured Image: Megapixl @ 4kclips
