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This Top Warren Buffett Stock Is Becoming a Dividend Growth Machine

Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has famously avoided paying dividends. It has other priorities for the cash it generates, including investing it in buying shares of other companies. One of Berkshire's biggest investments has been in oil giant Occidental Petroleum (NYSE: OXY).

While Buffett doesn't want to pay dividends to his investors, they are becoming Occidental's top priority. It has grown its payout rapidly in recent years, which will likely continue.

Building back up

Occidental Petroleum hasn't always prioritized paying dividends. The oil giant slashed its payout by 98.7% during the pandemic, cutting the quarterly payment down to a penny per share. It made the difficult decision to reduce its dividend so that it could retain additional cash for debt reduction. After making a debt-funded deal to buy fellow producer Anadarko Petroleum in 2019, it needed to shore up its balance sheet when prices crashed the following year.

The company's strategy to rebuild its financial foundation has paid off. It has allowed the oil giant to rapidly increase its payout:

A chart showing the rapid rise of Occidental's dividend.

Data source: Occidental Petroleum. NOTE: Chart by the author. (The 2024 dividend is an annualization of the current quarterly rate).

The oil company most recently increased its dividend by 22%. It has now boosted its payout by an eye-popping 2,100% off its reset base in 2020.

Occidental expects to continue growing its payout in the future. The company has invested heavily to grow its cash flow, including agreeing to acquire the cash-gushing CrownRock in a $12 billion deal. "The incremental cash flow will support our cash flow priority of delivering a sustainable and growing dividend, along with deleveraging and share repurchases after reducing the principal debt to $15 billion," stated CEO Vicki Hollub on the company's recent fourth-quarter conference call. The company expects the acquisition will boost its annual free cash flow by $1 billion, which helped fuel its decision to increase its dividend by 22% this year.

The company also expects to use its growing free cash flow to pay down debt following that acquisition. "As a result of the acquisition, we expect to strengthen our balance sheet, improve our resilience, and lower commodity price environments, and free up cash from interest payments to support future sustainable dividend growth and share repurchases," stated Hollub on the call. She reiterated that the company plans to pay a sustainable and growing dividend several more times on the call.

Buffett will benefit from Occidental's rising dividend

Occidental Petroleum is currently one of Berkshire's top income producers. Buffett's company is benefiting from its preferred stock investment (which it made to support Occidental's acquisition of Anadarko) and massive common stock position. Warren Buffett's company currently owns 248 million shares of Occidental (28.3% of its outstanding shares). While Berkshire's dividends from the preferred investment have fallen as Occidental started redeeming that investment, its common stock dividends are surging.

At the new payout level, Berkshire will collect over $218 million in dividends from Occidental this year, up from about $178 million at the prior rate. That income will likely continue growing as Occidental increases its dividend and Berkshire buys more shares. That growing dividend will give Berkshire more cash to allocate to create value for its investors. It will also help offset the future decline of preferred dividends as Occidental redeems that investment. Those redemptions are likely going on pause through the end of next year as Occidental shifts its focus from repurchasing stock to quickly repaying the debt used to acquire CrownRock. However, once it hits its debt target, it can redirect its excess cash toward buying back stock and potentially accelerating the common dividend growth rate.

The fast-paced growth will likely continue

Occidental Petroleum has been growing its dividend briskly since getting its balance sheet back on solid ground. That trend should continue even as the company works to reduce the debt it will incur to buy CrownRock. Meanwhile, it can potentially grow its payout even faster once it has redeemed Berkshire's preferred investment since that move will save it a lot of money. That makes Occidental Petroleum a compelling option for those seeking a rapidly rising dividend that earned Warren Buffett's seal of approval.

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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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