Variable Dividends Are a Growing Trend in Resources and Energy. Here’s Who Doing It—and Why.

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For companies that pump cash, dividends are a popular way to share it with their shareholders. But that cash-generating power can fluctuate, so many companies in the energy and resources sectors are turning to variable dividend payouts.

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Here’s how it works: Companies pay a relatively low base dividend that they believe they can sustain throughout the economic cycle, plus a variable dividend based on their earnings that includes Often a formula is involved. This differs from special dividends, which are sometimes one-time events related to the sale of a business.

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Convertible dividends are playing well with investors. They put a premium valuation on Devon Energy

(ticker: DVN) and Pioneer Natural Resources

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(PXD), both of which were initially variable strategy adopters, now claim yields of about 7% between their base and variable dividends.


(COP) is another trader, though its combined yield is lower at 3%. Diamondback Energy

(FANG), a large exploration and production company, plans to commission the structure in 2022.

The energy convertible dividend should be higher in 2022 thanks to a rally in oil prices, which peaked at $82 a barrel last week and could be headed for $100.

And if oil bulls like Goldman Sachs commodity analyst Jeff Curry are right about the energy supercycle this decade, it could be a good 10 years to dividend.

Outside Energy, Newmont

(NEM), the top gold miner, has a similar dividend outlook and now yields about 4% between its base and variable payouts. Leading global copper miner Freeport-McMoRan (FCX) has declared a double dividend, though its yield is now modest, at 1.3%. agco

(AGCO), the farm-equipment manufacturer, pays a base dividend of only 0.6%, but complements that with an annual special dividend for earnings, which has raised its overall dividend yield to 4%.

The resources sector is well positioned to pay higher dividends as balance sheets are in their best shape in decades and profits are substantial.

“The mining industry is very focused on capital returns,” explains Jefferies analyst Chris LaFemina. “With the balance sheet generally repaired, there will be substantial capital returns. The only debate is structure. ,

OneMen Holdings

(OMF) is a rare financial company that has followed a variant of the basis/convertible strategy. It gives consumer installment loans to low-principal customers at interest rates above 20%, leading to higher returns. It has been paying huge variable half yearly dividend for the last two years. Base dividends are $2.80 per share annually, and OneMan has paid $6.75 per share in convertible dividends over the past 12 months, or a total of $9.55, paid at a recent stock price of $55 for a trailing yield of 17% .

“Investors love that the company is optimizing its capital structure while still achieving a good dividend yield,” says Jefferies analyst John Hecht. The stock has a $70 price target.

Variable dividends aren’t for everyone, but they can be a good way for companies to maintain financial discipline and return cash when many investors are hungry for income.

A fan of this strategy is David King, manager of the Columbia Flexible Capital Income Fund. “I’m really high on companies with formulaic special dividends,” he says. “They are not well understood by the market.” Funds that it manages itself OneMain, Pioneer, and insurer Progressive

(PGR), which has paid out additional capital in a special dividend in recent years.

Variable dividend approach differs from approach taken by Exxon Mobil

(XOM) and Chevron

(CVX), which pay relatively high base dividends and want to maintain them throughout the cycle. Exxon, which yields 5%, and Chevron, with a 4.2% yield, had to take out debt to pay their dividends during the pandemic as energy prices plummeted. They are now in a position to lift them considering the strength in oil and gas.

Devon was the first major energy company to move to the variable dividend format a year ago. The company pays a nominal base dividend of 44 cents annually, with the stock price at $49 for a yield of less than 1%. It paid a 73-percent convertible dividend based on the formula for up to 50% of its additional free cash flow in the fourth quarter. Devon’s total 2022 dividend could increase from $3.36 annually to $4 per share in the fourth quarter.

Devon CEO Rick Muncrife says, “We are responding to what our investors want. “They’re saying: ‘We don’t want increased production, and we want to see capital coming back to us primarily through dividends rather than stock buybacks.’ “Investors love the clarity of the formula, he adds.

Resource companies are prime candidates for variable dividends because of the volatility of their earnings.

steel makers, especially Nucor

(NUE), the industry leader should consider them as a complement to stock buybacks. Nucor, whose stock trades for about $110, pays a dividend of $2 annually. With its substantial profits, Nucor supports stock repurchases, buying back more than $3 billion of stock in 2021, while paying out $600 million in dividends.

“We think our stock is undervalued and we create more value for shareholders by buying back shares,” says Jim Fryce, Nucor’s chief financial officer.

barrick gold

(Gold), the No. 2 gold miner, faces pressure from investors to unveil a variable dividend to match Newmont. Barrick is expected to disclose his decision next month, when he reports quarterly earnings. Newmont, whose shares trade for about $60, pays a principal dividend of $1 per share and a variable linked to gold prices, which is now $1.20 per year.

Jefferies’ Lafemina believes BHP Group

(BHP) and Rio Tinto

(RIO), the world’s two largest iron-ore producers, should adopt a base/variable dividend structure instead of their current variable payout, which resulted in large yields last year.

“A 4% base dividend is very likely for them,” he says, adding that it will support their stock prices if iron-ore prices go down. Both have little or no net debt on their balance sheets.

Besides energy and resources, who else could be a candidate?

Try JPMorgan Chase


), the largest bank in the country. JPMorgan CEO Jamie Dimon questioned the prudentness of share buybacks at elevated stock prices, saying three years ago that buying the stock back at three times its tangible book value would be “crazy.”

With its stock rally over the past year to a recent $160, the bank trades for about 2.3 times tangible book value. Its base dividend is now $4 per share per year, or a 2.5% yield and one-third of projected 2022 earnings.

King of Columbia, a longtime holder of JP Morgan, says: “It would be an interesting idea for them to consider a disciplined or formulaic special dividend. The accounting and regulatory optics of share buybacks do not do well in the tangible book from high multiples.”

JPMorgan declined to comment.

Corporate executives in general may be reluctant to reduce stock buybacks because of what it may indicate about their share prices. Convertible dividends, nevertheless, are likely to provide and hold more income opportunities to investors.

Write Andrew Berry [email protected] Feather


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