ConocoPhillips's announcement that it will hike its quarterly dividend by a massive 38% could work to attract investors but could also damage the company's credit quality in the long term, analysts said.
"The [dividend] increase underscores management's commitment to shareholders and to balancing spending and shareholder distributions," Evercore ISI analyst Doug Terreson wrote in an Oct. 8 note to clients. "This strategy almost always leads to higher returns and valuation in the mature global energy business."
Despite ongoing energy price volatility, ConocoPhillips will increase its quarterly dividend to 42 cents per share, which represents an annual cost of about $500 million and plans to buy back $3 billion worth of its shares in 2020. The increase comes at a time when generalist investors have been reluctant to put their money into energy stocks due to sluggish oil prices, a focus on sustainability, and capital discipline concerns amid declining cash flow.
"ConocoPhillips has been one of the companies in the space that have been most receptive to investor pressure to return cash to shareholders and spend within cash flows," Raymond James analyst Muhammed Ghulam said in an Oct. 7 email.
Over the years, ConocoPhillips has remained focused on financial discipline and indicated in May that there were no plans for the company to look for any major mergers or acquisitions.
However, giving cash to shareholders in the form of a dividend increase or share buyback has done little to stop the decline in stock values of exploration and production companies, analysts from Moody's noted in a June report. Spending free cash on shareholders rather than paying down debt pushes companies toward activities that are negative for credit quality, Moody's added, such as mergers and acquisitions.
"[ConocoPhillips] has outperformed the [S&P] E&P index, but the issue they (and all others in the space) face is an overall dislike of energy among generalists. That is the issue that really needs to be solved, but all else equal, this [Conoco's dividend increase] should help some," Ghulam added.
From late 2016 through 2018, ConocoPhillips repurchased $6 billion in shares and the company is on track to buy back $3.5 billion in shares this year, analysts from Tudor Pickering Holt & Co. said in an Oct. 8 note.
The company remains a favorite of the investment community. "The 38% increase to the quarterly dividend puts the total pro-forma 2020 yield at 8.3% (5.1% buybacks + 3.2% dividend), which alongside long-term free cash flow generation and a solid balance sheet at strip keep [ConocoPhillips] our favorite large-cap value pick in the E&P space," Tudor Pickering Holt said.
In the last year, other large energy companies such as Exxon Mobil Corp., Chevron Corp., Equinor ASA and Total SA have also announced dividend increases, although at much lower levels than ConocoPhillips's latest increase.

