6 High Yield Energy Stocks With Large Buyback Programs And High Total Yields

  • These six energy stocks have high dividend yields and also substantial buyback programs.
  • The buybacks will allow the companies to eventually increase their dividend per share payments over time. They also give these stocks high total yields to shareholders.
  • The six stocks are Viper Energy Partners LP, Hess Midstream LP, Exxon Mobil, Shell Plc, Valero Energy, and Marathon Petroleum Corp.

These six energy and utility stocks have two attractive features: high dividend yields and also significant buyback programs. This implies that the companies have positive free cash flow ("FCF") and use that FCF to repurchase their common stock shares.

As a result, the denominator in the dividends per share ratio decreases with each share repurchase. Over a period of time, this allows the company to raise its dividends per share for the same amount of dividends paid by the company.

The six stocks are Viper Energy Partners (VNOM), Hess Midstream LP (HESM), Exxon Mobil (XOM), Shell Plc (SHEL), Valero Energy (VLO), and Marathon Petroleum Corp (MPC). 

Let's dive in and look at these stocks.

Source: Viper Energy Investor Relations

Viper Energy Partners (VNOM)

Viper Energy Partners LP is an oil and natural gas company in the U.S. that operates mostly in the Permian Basin and Eagle Ford Shale. The company pays a variable quarterly dividend based on its profitability and cash flow each quarter. 

The latest quarterly dividend was 81 cents, putting it on an annualized rate of $3.24. So at today's price (Sept. 23) of $26.87, the stock has a 12.0%.

For the past four calendar quarters, VNOM has paid a quarterly dividend of 58.25 cents per share. That works out to an annualized rate of $2.33 and gives the stock an average yield of 8.67% (i.e., $2.33/$26.87).

Viper Energy Partners has also been buying back significant amounts of its common stock. In the past quarter ending June 30, it spent $28.9 million on share buybacks. Annualized that works out to a run rate of $115.60 million. This represents 2.35% of its $4.91 billion market value.

So VNOM stock has an average yield of 8.67% and a 2.35% buyback yield. That represents a potential total yield of 11.0% for shareholders.

Source: Hess Midstream Investor Relations

Hess Midstream LP (HESM)

Hess Midstream LP is a Houston-based midstream or storage and pipeline company in the oil and gas arena. It pays out a consistently growing dividend that has risen incrementally every quarter since 2017.

Right now its latest quarterly dividend of 55.59 cents works out to an annualized rate of $2.2236 per share. At $25.05 per share on Sept. 23, this gives the stock an annualized yield of 8.87%. 

But investors can expect that the company will continue to raise the dividend quarterly as it has consistently done. That effectively gives it a 9.0% dividend yield going forward.

In addition, last quarter Hess Midstream Partners bought back $400 million of its common stock. It doesn't necessarily do this every quarter, as management made clear in its latest Q2 quarterly conference call.

But in the last year, Hess Midstream has repurchased $1.15 billion of its shares. That works out to 18% of its market capitalization of $6.38 billion. This is also on par with its approach of balancing dividend growth with share buybacks. 

The bottom line here is that Hess Midstream has a total yield, including buybacks and dividends of about 27% (i.e., 9% dividend yield and 18% buyback yield). That bodes very well for HESM stock going forward.

Source: ExxonMobil Investor Relations

Exxon Mobil Corp (XOM)

Exxon has started buying back significant amounts of common stock. In the past two quarters ending June 30, it has paid almost $6 billion on buybacks.

In fact, in Q2 it spent $3.9 billion on buybacks. That puts it on an annualized run rate of $15.68 billion, or 4.15% of its huge $377.5 billion market capitalization.

Its annualized dividend of $3.52 per share gives the stock a dividend yield of 4.1% at today's price of $85.75 (Sep. 23). This also puts XOM stock on a total yield of 8.2% (i.e., 4.15% buyback yield and 4.1% dividend yield).

In the company's latest conference call management indicated that it expects to buy back $30 billion of its shares through 2023.

That means in the next 6 quarters it will spend $24 billion and buy back an average of $4 billion quarterly. That is what it did in Q2. This puts it at an annualized rate of $16 billion annually, or a buyback yield of 4.2%. Over a period of three years, that means that it could reduce its shares by at least 10 to 12%. That means for the same dividend cost its dividends per share could grow 10% every three years.

Bottom line: expect XOM stock to do very well over the next year given dividend growth as a direct result of its buybacks

Source: Shell YouTube video

Shell Plc (SHEL)

Shell has been buying back large amounts of its stock shares. That activity serves as a major catalyst pushing the stock higher.

On July 28, the company announced a $6 billion share buyback program that it expects to complete by the end of Q3. Actually, it will have until Oct. 27 when it makes the Q3 announcement.

Given Shell Plc's $173 billion market cap, that represents an approximate 3.0% reduction in its share capital during a three-month period.

If the company continues this activity going forward that could potentially mean the oil and gas company has an annualized 10% - 12% buyback yield.

On top of this, the company pays an annualized dividend of $2.00 per share. At today's price (Sept. 23) of $48.11, that gives it an annual dividend yield of 4.16%. 

As a result, Shell has a prospective total yield of 16% to 18% (i.e., dividend yield of 4% plus buyback yield of 10% to 12%). That represents a good return for investors over the long run. 

By the way, Shell is one of the few energy companies that has pledged to become a net zero emissions energy business by 2050.

Source: Valero Investor Relations

Valero Energy Corp (VLO)

Valero Energy is a downstream oil and gas refining and oil products distribution company. This past quarter (Q2) the company ramped up its stock buyback activity and made it clear it will continue to do so.

For example, Valero bought back $1.748 billion of its shares during Q2. That was well below the $5.4 billion in free cash flow ("FCF") it generated during Q2. In addition, its dividends cost $1.1 billion. Altogether it spent just $2.87 billion on shareholder capital returns or 52% of its FCF.

That coincides with management's stated goal of paying out 40% to 50% of its cash flow to shareholders. Here is what that means for investors.

The current dividend rate of 98 cents quarterly works out to an annual yield of 3.90% (i.e., $3.92 annually/ $100.57 price as of Sept. 23).

In addition, if the company keeps buying back $1.75 billion quarterly of its shares, that works out to $7.0 to $7.5 billion annually. That represents an amazing 16.5% to 17.7% annually of its total $42.39 billion market capitalization (i.e., 17% on average)

As a result, investors in Valero Energy can expect a total yield of almost 21% annually (i.e., 3.9% dividend yield + 17% buyback yield, or 20.9%). That is a very high total yield and bodes very well for both dividend per share growth and a higher stock price.

Source: Marathon Petroleum Corp Investor Relations

Marathon Petroleum Corp (MPC)

Like Valero, Marathon Petroleum Corp (MPC), not to be confused with Marathon Oil Corp (MRO), is a downstream oil refining and marketing company. In Q2 Marathon ramped up its share buybacks to $2.846 billion. That represents over 100% of its $2.5 billion in cash flow from operations. On top of that, the company spent $330 million on dividends.

As a result, if Marathon keeps this up, its buybacks will reach $11.38 billion annually or 23.8% of its $47.86 billion market capitalization. In fact, during its Q2 conference call, the company said it had bought back $4.1 billion of its shares since its last quarterly call. In addition, it announced a new $5 billion stock repurchase authorization.

Assuming it spends $5 billion during Q3 and Q4 that will bring its total buybacks to $10 billion annually, or 20.9% of its market cap.

In addition, Marathon's $2.32 annual dividend per share provides an annual dividend yield of 2.54% based on its price of $91.45 as of Sept. 23.

This gives MPC stock a total yield of about 24% (i.e., 21% buyback yield plus 2.54% dividend yield). That will allow the company to increase its dividend per share, given the lower number of shares outstanding. It will also provide a good upside for the stock over time.

Bottom line

These six stocks have huge upside potential given that they pay significant dividends and buyback large amounts of their shares. Most of these companies seem committed to returning at least 50% of their annual cash flow to shareholders. That gives them good total yields for existing shareholders.

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Disclosure: None

Mark R. Hake, CFA, does not provide financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any ...

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