Warren Buffett, the controlling stockholder of Berkshire Hathaway (BRK.A) could very well increase its stake in Occidental Petroleum (OXY). Much was made about its recent regulatory approval to buy up to 50% of OXY on Friday, Aug. 19. But why would he do this? I looked into this and found much that Buffett probably likes about OXY right now.
The major reason Buffett likely will buy more of the shares is due to its powerful adj. free cash flow (FCF), which exceeded $4.2 billion during the quarter ending June 30 and was almost $7.5 billion for the first half. (FCF was actually slightly lower than that, according to my calculations, but more on that later).
OXY has already bought back $1.1 billion of its shares after spending $532 million during Q2 on buybacks (after huge capex spending). So far in Q3, it has spent $532 million on share repurchases (i.e., $1.1b - $568 million as of June 30). It is also highly likely to hike its dividend. Here is why.
Large Buybacks Coming and a Potential Dividend Hike
Vicki Hollub, President and Chief Executive Officer, laid out the company's plans for spending FCF during the Aug. 3 earnings conference call:
“Considering current commodity price expectations, we expect to repurchase a total of $3 billion of shares and reduce gross debt to the high teens by the end of this year.”
So, on top of the $1.1 billion in shares already bought back as of Aug. 3, OXY will keep this pace of spending on common stock through the end of the year. That could be a major catalyst in and of itself.
In addition, she said this about the dividend:
“Once we have completed the $3 billion share repurchase program and reduced our debt to the high teens, we intend to continue returning capital to shareholders in 2023 through a common dividend that is sustainable at $40 WTI as well as through an active share repurchase program.”
This implies that the company will likely hike the dividend. It is presently at 13 cents per quarter, or 52 cents annually. That gives OXY stock a dividend yield of just 0.75% at today's price of $68.89.
This is down from 79 cents per quarter of Q1 2020, or $3.16 annually. If even half of that dividend payment was restored, OXY stock would sport a 2.29% dividend yield.
Moreover, the company could clearly afford this dividend. For example, with 931.491 million shares outstanding as of June 30, an annual dividend of $1.58 would cost just $1.47 billion.
Buffett Likes What He Sees
Warren Buffett told Becky Quick of CNBC on March 7 that he read the company's Q1 earnings transcript and decided to buy more shares. He has probably done the same with the Q2 transcript and probably also likes what he sees here.
“I read every word, and this is exactly what I would be doing," he told Ms. Quick. Regarding Vicki Hollub, he said this: “She's running the company the right way," according to CNBC.
At the time, during Q1, Occidental Petroleum was not buying back shares. So this major change in Q2, buying back $532 million shares during the quarter and now $1.1 billion as of Aug. 19, is a change that Buffett has consistently and traditionally liked to see in his investments.
In addition, if he read the transcript of the Q2 earnings he can clearly see what her plan is through the end of the year. It is also on page 4 of the company's slide presentation (see below).
It's almost as if he could see Ms. Hollub writing him a report directly on OXY if Berkshire Hathaway controlled the company down the road. He wants to see large amounts of free cash flow generated that the parent company could eventually use. The fact that OXY is buying back shares shows she knows how to return excess FCF to the company's owners.
The moral of this story is this: Expect to see Warren Buffett use his ability to buy more shares in Occidental Petroleum. That could be a good catalyst for OXY stock.
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