Occidental Petroleum (OXY) is expected to raise its dividend next month, with earnings results on Feb. 19. Based on its average yield over the last two years, an 8% dividend hike could push OXY stock up by over 22%.
OXY is at $50.05 in midday trading on Friday, Jan. 24., up from a recent low of $45.36 on Dec. 19, but down from a high of $51.55 on Jan. 7.
However, based on projections of at least an 8% dividend hike next month, OXY could be worth $61.29 per share. This is based on its strong free cash flow (FCF) and the average dividend yield for the past two years.
Oxy's Strong Free Cash Flow (FCF) and FCF Margins
Last quarter Occidental generated $8.183 billion in operating cash flow (OCF) and after capex spending of $5.09 billion, its free cash flow (FCF) was over $3 billion YTD:
$8.18b OCF - $5.09b capex = $3.09 billion YTD FCF
That represented over 15.4% of its $20.04 billion in revenue YTD. This is important since we can use that to estimate its future FCF.
Moreover, this $3 billion in FCF was more than enough to cover the dividends paid out so far this year:
$3.09 billion FCF - $1.09 billion dividend cost YTD = $2.0 excess FCF
Note that this was after the company raised its dividend by over 22% from 72 cents per share annually in 2023 to 88 cents per share in 2024.
In other words, there is more than enough room for Occidental to raise its dividend in the future.
Forecasting the Dividend Hike and Dividend Yield
So far this year, Occidental has generated lower FCF than last year. That could push the board to increase the dividend by a lower percentage than last year.
But since it has already paid out 4 quarters at the 88-cent quarterly rate, Occidental will likely raise the dividend per share (DPS) next month.
Let's assume the dividend rises by 8% to 95 cents per share. That is less than half the 22% hike it did last year, so this is a conservative increase.
Where will OXY stock go after this? Let's look at its average dividend yield.
According to Morningstar, OXY had an average yield of 0.83% in 2022, 1.21% in 2023, and 1.78% in 2024. However, the dividend was only paid for two quarters in 2022.
So, the average adjusted yield for the past three years was:
2022: 0.83% x 2 = 1.66%
2023: 1.21%
2024 1.78%
Average Yield ….. 1.55%
Therefore, we can use that yield to estimate where the stock price will trade with the dividend hike:
$0.95 / 0.0155 = $61.29 per share
That is +22.5% over today's price of $55.05 per share.
The bottom line is that OXY stock looks very cheap, given a conservative dividend hike estimate using its average yield.
Analyst Price Targets
Note that this coincides with an FCF estimate for Oxy stock. For example, we can estimate Occidental will generate $4.5 billion in FCF next year (i.e., 16% FCF margin x $28.12 billion revenue estimate).
Therefore, using a conservative 6.5% FCF yield metric (i.e., 15x FCF), OXY stock would be worth over $69 per share:
$4.5b FCF / 0.065 = $69.23 per share
Other analysts agree. For example, AnaChart reports that the average price target of 22 analysts is $59.44 per share. Yahoo! Finance also reports that 28 analysts have an average $62.29 price target. Barchart has a similar mean target: $60.60 per share.
The average of these three analyst surveys is $60.77. That is close to my dividend price target of $61.29.
One way to play this is to sell short out-of-the-money (OTM) put options in nearby expiry periods. That way the investor can set a lower buy-on price target and get paid while waiting.
Shorting OTM Puts
For example, look at the Feb. 21, 2025, expiry period, 28 days from now. It shows that the $47.00 strike price put options have a premium of 48 cents on the bid side.
That means that a cash-secured short-put play can provide an immediate yield of 1.0% (i.e., $0.48 / $47.00 = 0.0102) over the next month.
That means that if an investor can repeat this trade every month for a year, the expected return (ER) is 12.24% annually (i.e., .0102 x 12 = 0.1224).
The worst that could happen to the investor here is that they would end up buying 100 shares (i.e., 1 put contract) at $47.00. That means that the with a 95 cent DPS going forward, the dividend yield would be 2.02%.
Moreover, the investor could continue to repeat this trade or even sell covered calls.
The bottom line is that OXY stock looks very cheap here, given the expected dividend hike. One way to play this is to sell short cash-secured puts in nearby expiry periods.
