Shares of Devon Energy (DVN) have underperformed the broader markets year-to-date (YTD). So far in 2023, the S&P 500 Index ($SPX) has surged over 19%, while Devon Energy stock is down 14%.
Even if we take a longer-term view, the energy stock has returned 31% to shareholders since August 2013, after adjusting for dividends. In this same period, the S&P 500 has generated cumulative gains of 224%.
However, the stock could be poised for seasonal outperformance. In August 2022, DVN emerged as one of the top-performing S&P 500 stocks with its monthly gain of 13.1%. Plus, Devon Energy currently offers investors a tasty dividend yield of 8.5%, given its annual payout of $4.51 per share.
As July comes to a close, let's see if it makes sense to invest in DVN right now.
Devon Energy stock and oil prices
A Delaware-based company, Devon Energy is engaged in the exploration, development, and production of oil, natural gas, and natural gas liquids. Its operations are concentrated in several onshore regions in the United States.
In early 2021, Devon Energy completed an all-stock merger with WPX, another oil and gas company with assets in Texas, New Mexico, and North Dakota. The merger enhanced Devon's scale of operations, allowing it to increase revenue from $6.22 billion in 2019 to $19.16 billion in 2022.
Of course, the performance of energy companies is closely tied to the price of oil. When oil prices soar, the cash flows and earnings of Devon Energy and its peers tend to rise as well, allowing the company to increase dividend payouts.
Energy prices have cooled off in the last year, and members of the Organization of the Petroleum Exporting Countries (OPEC) have reduced output to provide support for oil amid a sluggish macro environment. However, stronger demand from industrial economies, such as India and China, should boost oil in the second half of 2023. For instance, according to the International Energy Agency (IEA), global oil demand might average 102.3 million BPD (barrels per day), up by 400,000 BPD from its previous guidance.
Does Devon Energy stock pay investors a dividend?
Yes, Devon Energy pays shareholders a dividend. However, these payouts fluctuate depending on oil prices. Devon Energy has a fixed and variable dividend model where the base dividend is fixed yearly. It then pays investors a quarterly variable dividend limited to 50% of excess cash flows.
When oil prices are $70 per barrel, Devon Energy can generate $2 billion in free cash flow, indicating a yield of 8%. At $80 per barrel, its free cash flow yield increases to 10%, while at $90 per barrel, it surges to 12%.
In 2021, Devon Energy paid shareholders an annual dividend of $1.97 per share, which rose to $5.17 per share in 2022. However, in the first six months of 2023, Devon has paid $1.61 per share in dividends, taking its payout to $4.51 per share in the last year, while its fixed payout was up 11% year over year in 2023.
On a trailing 12-month basis, Devon Energy has a forward yield of 8.5%. But if we look at the past six months, its yield falls to 6%.
What is the target price for Devon Energy stock?
Devon Energy's oil production touched record highs in Q1 of 2023, exceeding 320,000 barrels per day. However, its earnings are forecast to narrow from $8.31 per share in 2022 to $5.53 per share in 2023.
Of the 21 analysts tracking Devon Energy stock, 12 recommend a "strong buy,” and nine recommend a "hold." The average target price for DVN stock is $61.71, about 20% above its current trading price.
Last month, brokerage firm Goldman Sachs (GS) upgraded DVN stock to "buy" from "neutral" due to its cheap valuation and lower cost of raw materials. Analyst Neil Mehta expects Devon's average free cash flow yield to rise to 13% between 2024 and 2026, higher than the peer average of 11%.
Is Devon Energy stock a buy, sell or hold?
Priced at 10 times forward earnings, Devon Energy stock is relatively cheap. With $3.9 billion in total liquidity, the company is well capitalized and ended Q1 with a net-debt-to-EBITDA multiple of 0.6x, which is quite sustainable. Devon Energy has reduced debt by $1.2 billion since the start of 2021, and 60% of its outstanding debt obligations mature after 2030.
Devon Energy's own management believes the stock is a value at current levels. DVN is trading around the same price point where CEO Richard Muncrief bought 15,000 shares worth $797,800 last February, representing a powerful vote of confidence in the stock's prospects. Separately, Devon increased its share buyback plan in May by 50% to $3 billion.
Overall, Devon Energy appears fundamentally strong and focused on enhancing shareholder returns. If you expect oil prices to rise, you can consider adding the stock to your portfolio in anticipation of an increase in its share price.
That said, traders expecting another breakout August performance should be aware of heightened event risk in the days ahead. Devon Energy is slated to report earnings after the closing bell on Tuesday, Aug. 1, and the stock has declined in each of the last four sessions immediately following its quarterly report.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
