Why One Analyst Just Downgraded This Investor-Favorite Energy Dividend Stock

Oil (CLZ24) and natural gas (NGZ24) giant Devon Energy Corporation (DVN) has long been a standout in the energy sector, earning a loyal following of investors who value its commitment to rewarding shareholders. Known for its strong capital return strategy, the company has built trust by offering both fixed and variable dividends, as well as stock buybacks when its shares are undervalued, ensuring investors feel the love when times are good.

Devon Energy takes a bold approach to dividends, adjusting payouts based on market conditions, especially the ebb and flow of commodity prices. This strategy allows the company to reward shareholders handsomely when the market is strong. But when commodity prices falter, it can quickly turn into a double-edged sword for income-seeking investors, with dividend cuts raising concerns about the stability of future returns.

And in fact, the company's dividend strategy has hit a rough patch lately. Recent cuts over several quarters have left both investors and analysts on edge. With payouts shrinking and the previously thriving dividend structure now facing a more cautious approach, concerns are mounting about whether Devon is stepping back from its commitment to shareholders. Let’s dive deeper into the fundamentals of this energy stock in detail.

About Devon Energy Corporation Stock

Valued at around $25.8 billion by market cap, Oklahoma City-based Devon Energy Corporation (DVN) is a top independent oil and natural gas exploration and production company. With a strong focus on onshore operations across the United States, Devon’s diverse portfolio of oil and gas assets ensures stable production while paving the way for competitive shareholder returns alongside future growth opportunities.

However, despite its strong portfolio and stable production, Devon Energy's stock has faced a tough year amid weakness in commodity prices, with shares plunging 15.5% over the past 52 weeks. 

From a valuation perspective, DVN is now trading at just 4.65 times enterprise value to EBITDA and 3.78 times cash flow, which represent a discount to both its own five-year averages and the energy sector medians.

In addition to paying dividends, Devon Energy enhances shareholder value through strategic share repurchases. Since the buyback program began in late 2021, Devon has invested $3 billion in its own shares, underscoring its commitment to returning value to investors.

Devon Energy Beats Q3 Earnings Projections

Following the company’s Q3 earnings results, which blew past Wall Street’s predictions, shares of Devon Energy gained 1.7% on Nov. 6. Total revenue of $4 billion increased roughly 5% year over year, while core earnings of $1.10 per share exceeded Wall Street’s forecast of $1.06 per share. Strong cash generation was reported, with $1.7 billion in operating cash flow and $786 million in free cash flow.

During the quarter, Devon Energy exceeded management’s expectations, with oil production hitting 335,000 barrels per day, nearly 4% above guidance. Total companywide production reached 728,000 oil-equivalent barrels (Boe) per day, marking a 3% increase from the previous quarter. The strong performance was further bolstered by the Grayson Mill acquisition in September, which added approximately 5,000 Boe per day, including 3,000 barrels of oil per day, to the company’s overall production.  

This strategic acquisition enhances Devon’s position as one of the largest oil producers in the U.S., adding a high-margin production mix. It also transforms the company's Williston Basin operations, bringing in 307,000 net acres and 500 undrilled locations, solidifying its growth potential in the region.

Thanks to the successful Grayson Mill acquisition and strong YTD performance, management raised its Q4 production forecast to a range between 811,000 Boe per day and 830,000 Boe per day, reflecting a 13% increase from Q3. This growth is driven by an additional 110,000 Boe per day from the Williston Basin acquisition.

Additionally, the company adjusted its capital outlook for the quarter to $950 million, which includes $150 million in incremental capital tied to the acquisition. Analysts tracking Devon Energy project the company’s bottom line to shrink 14.9% year over year in fiscal 2024 before rising 4.1% annually to $5.06 per share in fiscal 2025.

A Closer Look At Devon Energy’s Dividend Trends Over The Years

Since June 1993, Devon Energy has demonstrated a strong commitment to long-term investor value through steady quarterly dividends. Driven by a goal to maximize returns, Devon’s dividend strategy traditionally balances stability with flexibility, adjusting payments based on earnings, cash flow, market dynamics, and overall company performance.

However, a noticeable shift began in 2022. That year, Devon paid out an impressive $5.17 per share, of which $4.49 stemmed from variable dividends, a reflection of robust commodity prices. With growing macroeconomic uncertainty making oil and gas prices more volatile, Devon shifted to a more conservative approach in 2023, reducing the total dividend (a combination of fixed and variable dividends) to $2.87 per share. This strategic decision allowed Devon to prioritize financial resilience and retain capital for other critical needs.

Most recently, on Nov. 4, Devon announced a fixed quarterly dividend of $0.22 per share for Q4 of fiscal 2024, scheduled for distribution to its shareholders on Dec. 30. This upcoming payment marks a significant 50% cut from the previous quarter’s total $0.44 per share dividend, a move that underscores Devon's cautious stance amid ongoing market fluctuations.

The company said in its latest earnings release that given the recent volatility of commodity prices and equities, along with the added leverage on its balance sheet, it has chosen to skip declaring a variable dividend this quarter. Devon Energy's capital allocation strategy will now prioritize strengthening its balance sheet while continuing to return capital to shareholders through only fixed dividends coupled with strategic share buybacks.

With the trend of dividend moderation continuing into 2024, the company sought a careful balance between rewarding shareholders and investing in future growth, ultimately bringing the forward annualized dividend down to $1.45 per share, which translates to a yield of around 3.72%. Devon maintains a sustainable payout ratio of 39.37%, which indicates that there is still a healthy chance that the company might boost its dividends in the future.

What Do Analysts Expect For Devon Energy Stock?

Devon's shares plunged more than 2% on Nov. 7 after Truist’s downgrade to a “Hold” rating, with the price target reduced to $43 from $49. While the company reported better-than-expected Q3 figures and raised its Q4 production outlook, the downgrade stems from concerns about Devon’s commitment to shareholder returns.

Devon Energy’s commitment to enhancing shareholder returns and driving operational improvements positions the company to reap substantial rewards from the current high commodity price environment, according to Truist’s Neal Dingmann. While the company remains dedicated to its quarterly dividend and has increased stock repurchases, Dingmann points out that Devon’s overall dividend yield has significantly diminished from its previous levels.

Furthermore, the analyst pointed out that the company appears cautious about committing to a minimum total shareholder payout ratio. On the other hand, Dingmann highlights Devon’s strategic acquisition of Grayson Mill in late Q3, which added 307K net acres to its portfolio.

This expansion is expected to boost Williston Basin oil production to account for roughly 25% of the company’s total output, with the Permian continuing to represent around 50%. Despite Bakken’s higher oil content, well data suggests Devon’s Delaware Basin wells are outperforming those in Grayson, potentially influencing the company’s future production mix and growth trajectory.

Despite Truist’s cautious stance, Wall Street remains optimistic about DVN stock overall, with a consensus “Moderate Buy” rating. Of the 25 analysts covering the stock, 13 advise a “Strong Buy,” two suggest “Moderate Buy,” and the remaining 10 recommend a “Hold.”

The average analyst price target of $51.67 indicates a potential upside of 34.3% from the current price levels.