Black Stone Minerals Just Raised Its Dividend, But It's Still Cheap

As expected, Black Stone Minerals (BSM), the largest pure-play oil and gas minerals and royalty owner in the U.S. raised its quarterly dividend. But BSM stock is still cheap today as it has a 10.2% dividend yield and trades for less than 8x forward earnings.

On Oct. 19, the company set its quarterly dividend at 45 cents per share, up from 42 cents last quarter. That gives investors a prospective $1.80 annual dividend or 10.2% of its price of $17.63 on Oct. 20. This is a 7% increase over the prior quarter and an 80% hike over last's years' quarterly dividend. 

Strong Earnings and Cash Flow Outlook

It reflects Black Stone Mineral's strong outlook for its oil and gas earnings going forward. This announcement was also made ahead of the release of its Q3 earnings set for after the close of business on Monday, Oct. 31.  

As it stands, analysts now forecast 43 cents per share in normalized earnings for Q3 and $1.64 for 2022 in total. But, going forward the average earnings per share (EPS) estimate from 3 analysts is for $2.24 per share next year.

As I wrote about recently, the company also has plenty of free cash flow that will more than cover this dividend increase.

In addition, if it becomes clear that EPS will be this high in 2023, investors can expect more dividend increases. For example, typically the company will pay out at least 90% of its net income. With this forecast, the dividend could reach at least $2.00 per share, or 11.1% higher than today's annualized $1.80 rate.

Where This Leaves Investors in BSM Stock

So far this past month, BSM stock is up over 8.4% and up almost 18% in the last 6 months. If the company keeps raising its dividends, it could go higher.

For example, with an annual $2.00 per share, BSM stock could climb to $20 per share with a 10% dividend yield. That implies the stock could rise 13.4% more from $17.63 to $20.00 per share.

That shows that BSM could be undervalued here even though the stock has already moved up considerably this year. As long as analysts continue to forecast strong earnings and cash flow, due to high oil and gas prices, investors might see good returns with BSM stock.

This should become even more clear as earnings are released on Oct. 31 and analysts revise their outlook for the company's earnings next year.

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