Investors often categorize companies into different buckets, like growth stocks versus dividend stocks, or large-cap companies versus small-cap companies. And while there are major differences between companies that don't pay dividends and those that do, there's an equally stark contrast between companies with complete capital return programs and those that mainly focus on dividends.
We're talking about stock repurchases -- where companies return capital to investors by buying back (and usually retiring) shares. Fewer shares shrink the pie and make each outstanding share more valuable. The practice is so powerful that Warren Buffett-led Berkshire Hathaway doesn't even bother paying a dividend -- choosing instead to reward shareholders by growing the business and repurchasing shares.
Investors looking for quality companies with sizable stock buyback programs have come to the right place. Here, three Fool.com contributors discuss why Chevron(NYSE: CVX), Owens Corning(NYSE: OC), and Phillips 66(NYSE: PSX) are three dividend stocks worth buying now.
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Chevron is delivering for shareholders in a variety of ways
Daniel Foelber (Chevron): Chevron is hovering around an all-time high for all the right reasons. The company's capital return program is at a record high, driven by strong dividend growth and stock buybacks.
In the most recent quarter -- Q1 2024 -- Chevron returned about $3 billion to shareholders through dividends and another $3 billion in buybacks. The latest quarterly dividend payment was $1.63, up 8% from the prior payment.
Chevron's dividend has increased by 22% in just three years, and it has increased its dividend for 37 consecutive years. The yield is a sizable 3.9%. In this vein, Chevron checks all the boxes dividend investors look for -- growth, track record, and yield. But what makes Chevron a particularly attractive investment is its dividend paired with its buyback program.
Chevron has funneled outsized profits into its stock repurchase program to reduce its share count, which makes the stock a better value and benefits existing shareholders by giving them greater ownership of the company. The buybacks have been adding up. Factoring in $3 billion from Q1, Chevron has repurchased $14.2 billion of its stock over the past 12 months -- nearly 5% of its market cap.
Compared to Q1 2023, Chevron generated 14% lower diluted earnings per share and 5.6% lower cash flow operations in Q1 2024. Its upstream earnings were actually higher as production surged 35% thanks to investments and acquisitions. But lower refining margins hammered its downstream business, and natural gas prices have been performing far weaker than oil prices.
So even though Chevron isn't at the top of its game and is facing some challenges, it is still putting up strong results that can support sizable buybacks and dividends -- which illustrates the strength of its business model and upstream portfolio.
Throw in Chevron's incredibly strong balance sheet and low net debt ratio, and you have a complete company that remains a foundational holding for investors looking to generate passive income from the oil patch.
Owens Corning's growth ambitions
Lee Samaha(Owens Corning): Deciding how to return cash to shareholders is no easy task, but I think Owens Corning, a roofing, insulation, and composites company, has done an excellent job of it in recent years. If the market values a stock at a low price-to-free cash flow (FCF) multiple, it makes sense for management to use that cash flow to buy back stock.
As you can see in the chart, the market did grant the company a lowly FCF multiple, and management opportunistically took advantage of this by buying back stock, resulting in a significant drop in outstanding shares.
Taking the argument further, the company's FCF per share has improved markedly more than its impressive enough FCF due to reduction in the share count.
Of course, the company could have used the cash to raise its dividend even more than it did so (from $0.90 per share in 2019 to $2.40 per share in 2024), but doing so might have restricted its ability to make a game-changing acquisition, as it's trying to do now by acquiring door company Masonite on an excellent valuation at a time of negative sentiment toward housing-related stocks.
I think the deal makes sense, as did the share buybacks, and the acquisition of Masonite will hopefully add even more value for shareholders.
Phillips 66 blends stock buybacks with a growing dividend
Scott Levine (Phillips 66): From managing 72,000 miles of pipeline throughout the United States to manufacturing chemicals to operating refineries, Phillips 66 generates strong revenue -- as well as cash flow -- from a variety of energy industry businesses. Over the past three years, for example, Phillips 66 has averaged annual operational cash flow of $8 billion. And to the delight of investors, the company is generous in returning capital to shareholders through its share buyback plan and its dividend.
Since its spinoff from ConocoPhillips in 2012, Phillips 66 has returned $39 billion to shareholders in stock buybacks and dividends. And there's more to come in the remainder of 2024.
Over the past two years, the company had totaled $8.3 billion in shareholder distributions, and it plans on meeting an upwardly revised target of returning a total $13 billion to $14 billion by the end of 2024. Regarding stock buybacks, Phillips 66 has used its strong cash flow to reduce its outstanding shares by 31% since 2012. The company's aggressive approach to rewarding shareholders warrants recognition for investors with an eye on dividends. From the first dividend it paid in Q3 2012 through Q4 2023, Phillips 66 has increased its distribution at a 16% compound annual growth rate.
With management's dedication to returning capital to shareholders, Phillips 66 has vastly outperformed the S&P 500 since its spinoff.
While there's no guarantee that management will extend its policy of returning ample capital to shareholders, management has stated a target of returning more than 50% of operating cash flow to investors. This is in concert with the company's strong financial position, which features an investment-grade balance sheet.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Owens Corning. The Motley Fool has a disclosure policy.
