This energy company is forecast to grow at an annual rate of 56.96% over the next five years. Its current annual dividend yield is 1.89%, paid quarterly.
Diamondback Energy, Inc. (FANG)
From Cabot Top Ten Trader
I’m a growth investor, but I’m also a student of the market, and I continue to think that energy stocks—which had been out of favor for many years and only got going in November 2020—are in the midst of a longer-term uptrend. Part of that is sentiment (who is overweight energy stocks these days?), but a lot has to do with a sea change in the industry: Out is the debt-financed, drill-at-all-costs expansion, and in is flat-ish production, cost controls and massive free cash flow.
There are many names that look decent, but one I think will do well next year even in a modest energy environment is Diamondback Energy, whose Q3 results were amazing: Free cash flow (cash flow less all CapEx) totaled $4 per share (~4% of the stock price), another dividend hike was announced (its third of the year; yield now close to 2.0%) and further debt reduction ($1.3 billion worth since March; no debt maturities for three years) occurred as output came in a bit above expectations.
But all of that pales in comparison to what’s possible in 2022 and beyond—the top brass believes it can keep output level with relatively tame CapEx (its breakeven oil price around $32!), and that should lead to ridiculous results, with nearly $13 of free cash flow per share even if oil averages $60 per barrel and natural gas averaged $3, and a ridiculous $19 per share if oil averages $80. And shareholders will see half of whatever the total is paid back in dividends and share buybacks (with the rest slashing debt even further). Translation: Even if oil energy prices have hiccups, Diamondback is likely to pay out a few percent in dividends and buy back a few percent of the company, starting in Q4.
Just as impressive to me is how FANG (and others) have held up during the latest market decline—even as oil prices have fallen 16% and natural gas is down 30%, this stock and its peers are down far less than that. And that’s the key: While the dividends are nice, what I’m betting on is a gradual change in investor perception by big buyers who are willing to build positions in these names (especially on dips), hiking the valuations as the boom-bust history of the industry is in the past. FANG certainly looks like one of the winners of the movement and I think 2022 will be fruitful.
Michael Cintolo, Cabot Top Ten Trader, cabotwealth.com, 978-745-5532, December 21, 2021