The Dynamic Dividend

Elevated Cash Returns Await ConocoPhillips Shareholders

ConocoPhillips (COP) announced plans to split into two companies this week, but the press release failed to elaborate on how the break up will affect the energy giant’s dividend. Will it be retained by ConocoPhillips, or split between the two companies? Actually, the end result will be far superior to either of those scenarios.

The company held a conference call (audio, presentation, transcript) later in the day to discuss the separation, and the Q&A session with analysts shed plenty of light on the company’s post-spin dividend intentions. I believe the way the company plans to handle its dividend is a hugely overlooked aspect of this transaction, giving investors a big opportunity to lock in an elevated yield.

Asked how the loss of cash generated by the downstream business will affect the share repurchase program of ConocoPhillips, CEO Jim Mulva’s response provided some insight into the dividend situation:

“It has no — really no change with respect to the approach of distributions and share repurchase of the upstream company … What we have in mind is that there be no change in the dividend for ConocoPhillips. We’re not reducing the dividend in ConocoPhillips … If you look at the downstream company, it is going to have a dividend that is competitive and comparable to others and the pure plays in the downstream part of the business. So the shareholder gets the current dividend from ConocoPhillips, plus when done, is going to get cash in a form of a new dividend from the downstream company”

So both companies will pay dividends, similar to the Marathon Oil (MRO) downstream spinoff earlier this year. But it sounds like, rather than split the current dividend rate between the two companies (as Marathon did), ConocoPhillips will retain its current payout and the downstream company will pay an additional dividend.

Pressed for clarification by the same analyst, Mulva simplified:

“Absolute dividend of ConocoPhillips upstream as you know it today continues, and there will be a new dividend coming from the downstream company.”

So there you have it. The stock’s current yield — already a robust 3.45% — actually understates the cash return shareholders can expect as soon as this transaction is complete. Investors will instantly begin collecting larger stacks of greenbacks, thanks to the additional dividend income provided by their downstream shares.

It’s also worth noting that losing its downstream cash flow won’t stall dividend growth at ConocoPhillips, which has earned Class E Dividend Dynamo status by improving its annual dividend output every year since 2001. In fact, just as the CEO of any great dividend-paying company should, Mulva welcomes the challenge of unloading more cash to shareholders. During his prepared remarks earlier in the conference call, he said “[we] like the discipline of increasing dividends every year.” That’s a great sign.

ConocoPhillips gave its shareholders a 20% raise in February. It was the company’s third double-digit dividend increase in a matter of six quarters, and its largest dividend hike in six years.