Shares of Devon Energy(NYSE: DVN) rose by 13.9% in March, according to data from S&P Global Market Intelligence. The move came down to a combination of an increase in the price of oil, from around $77 a barrel at the start to about $83 at the end of the month, and the Wall Street analyst community'a warming to the company's capital allocation policy in 2024.
Devon Energy is more than a high-yield stock
Many investors focus on the company's dividend payout and yield, and rightly so. However, there's much more to like about the company than just how much cash it allocates to investors in the form of dividends. For example, management also engages in substantive share buybacks when it thinks its stock is undervalued. That's good news for investors, because a lower share count means investors have a greater claim on the company's cash flow.
DVN Stock Buybacks (TTM) data by YCharts
Management plans to return 70% of free cash flow to investors in 2024 through share buybacks and dividends, with the remaining 30% used to retire debt and increase cash balances.
Investing for growth
However, before you get to free cash flow, there's Devon's program of investing capital to improve well productivity. This year's investment is focused on drilling in its core Delaware Basin assets straddling west Texas and New Mexico.
It's a plan that got a Citi analyst excited by its improving natural gas assets in March, and the analyst upgraded the price target on the stock to $55. A Wells Fargo analyst is more bullish, raising the price target to $59 because of Devon's focus on drilling its higher-quality Delaware Basin assets.
Management anticipates that its drilling activity will boost well productivity by 10% in 2024. Should that happen, investors can expect increased cash flow and shareholder returns, provided the oil price remains stable.
Image source: Getty Images.
Sustainable growth, sustainable dividends
Devon is an efficient producer, capable of generating enough cash to fund its capital program even if the price of oil drops to $40 a barrel. It can also fund the base dividend of $0.22 per quarter, with oil prices down to $45 a barrel.
As such, a significant decrease in oil prices would be required before Devon's investment plans and base dividend are at risk, and the stock is attractive for income-seekers, oil bulls, and value investors alike.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
