Devon Energy: Buy, Sell, or Hold?

Devon Energy is focused on returning value to shareholders via dividends and share buybacks, but it’s still an energy producer.

Devon Energy (DVN 0.19%) is an acquired taste — only appropriate for a certain kind of investor. That’s true despite a generous 4.6% dividend yield and a shareholder-friendly dividend and stock buyback policy. Here’s why this oil and natural gas company could be a buy or hold for some investors, but many more will likely want to avoid it.

Buy Devon Energy

Devon Energy is an upstream player in the U.S. energy sector. That means it produces oil and natural gas in the United States that it then sells to generate revenue. While the day-to-day operation of the company is probably very complex, the big picture here is fairly simple to understand. If U.S. oil and natural gas prices are on the rise, so, too, are Devon’s financial results. If oil and natural gas prices are declining, the company’s results reflect that accordingly.

DVN Chart

DVN data by YCharts

If you are looking for exposure to the energy sector, Devon Energy is a fairly direct way to get that exposure. You just have to go in knowing that its financial performance — and stock price — are likely to be just as volatile as energy prices. For example, with West Texas Intermediate crude prices up so far in 2024, Devon’s stock has advanced around 15% year to date. That’s more than twice the gain of the S&P 500 index.

But that’s not the end of the story. Devon’s dividend and share buybacks are directly tied to its financial results. In short, the dividend goes up and the company can buy back more stock when it is doing well financially. It will likely be performing well when oil and natural gas prices are high and/or rising. In this way, the stock offers some extra leverage to rising energy prices. If that’s something you’d like in your portfolio, Devon Energy is an option you should be strongly considering.

Sell Devon Energy

That said, there’s a downside to the oil and natural gas focus. When energy prices are falling, Devon’s stock will probably follow suit. And when its performance drops off, along with declining energy prices, the company will return less cash to investors via dividends and stock buybacks. That’s not going to be an attractive proposition for investors that are looking for an energy investment that can provide a reliable income stream.

DVN Chart

DVN data by YCharts

This variability is simply part of the story here, and there’s nothing that can be done about it. Devon Energy is an upstream producer and its revenue and earnings are directly tied to the ups and downs of the energy sector. Unless you can handle the often dramatic and swift price changes of oil and natural gas, you won’t want to own Devon Energy. There are other companies in the energy sector that have historically provided more consistent dividends.

Hold Devon Energy

If you step back from assessing Devon Energy as a company and consider the implications owning the stock might have for your broader life, meanwhile, there could be a place for it in a long-term investment plan. If you aren’t trying to time the ups and downs of energy commodity prices (which is not something most people should be trying to do), then you could view Devon’s variable dividend policy as a hedge against the real-world energy costs you face.

Effectively, just as higher energy prices are forcing you to pay more at the pump and to heat your home, Devon’s dividend will likely be going up (with a slight time lag). So, Devon will probably be providing you more dividend income just when you need a bit of extra cash. Of course, you have to understand that the extra cash will dry up when energy prices fall, but presumably you won’t need the extra cash anymore at that point. That could be a valuable addition to an income portfolio, but you have to go in understanding why you own Devon and what to expect from it.

A complex investment thesis

If you are a conservative dividend investor that likes consistency, then you will probably hate Devon Energy. It just isn’t designed for that, and you’d be better off with a midstream player like Enbridge or Enterprise Products Partners. Integrated energy giants like ExxonMobil or Chevron would also be better choices. However, if you are looking to gain almost direct exposure to energy prices or would like to hedge your real-world energy costs, Devon could be a good fit for your portfolio. The key is to understand what you are buying and why.

Reuben Gregg Brewer has positions in Enbridge. The Motley Fool has positions in and recommends Chevron and Enbridge. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.

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