Income investors aren't known for their risk-on attitude or speculative natures, but that doesn't mean there aren't speculations in the income-investment universe. A simple speculation is on distribution growth; in some cases, the opportunity for growth is significant. We're looking at 3 stocks that offer quality investment opportunities today and have a high probability of making a large or otherwise significant distribution increase next year. In the cases of Occidental Petroleum (NYSE: OXY) and Schlumberger (NYSE: SLB), the opportunity is for high-double-digit increases. At the same time, for Kraft Heinz (NASDAQ: KHC), the high yield and resumption of increases will drive value.
Occidental Petroleum on Track For 20% Dividend Increase
Like many other companies, Occidental Petroleum suspended its distribution during the pandemic to hoard cash and preserve the balance sheet. The company has since brought it back and even increased the payment, but the distribution still pales compared to the 2019 payouts. An increase to that level is worth nearly 340% to investors, quite a gain, but unlikely to come all at once. Occidental Petroleum's board and management prefer to use the cash and cash flow to repurchase shares, pay down debt, and refocus the capital structure in favor of shareholders.
Occidental's last report included the repurchase of $425 million in shares, about 0.75% of the market cap, and repurchases are expected to continue for the foreseeable future. The company has about $1.8 billion left under the current authorization. OXY also repurchased $522 million of its preferred stock, worth 18% of the total preferred equity. That move helps free up cash flow and is expected to continue until preferred shares are fully redeemed. As it is, the dividend is only about 10% of the EPS, and solid earnings performance is expected due to rising oil prices.
The outlook for distribution increases is robust and has a long runway. The analysts expect the company to hike the payment by an average of 20% in 2024 and should be able to sustain a double-digit pace for several years.
Schlumberger Is in a Dividend Super Cycle
Schlumberger's business is in an upswing driven by renewed investment by major oil companies that is supported by recently improved cash flow and operations. The super cycle is still in its early phases and gaining momentum based on new contracts revealed in the Q2 results. The takeaway for investors is that margins are widening significantly, about double the 2019 levels, and providing robust cash flow for the business.
Schlumberger only cut its dividend, in contrast to suspending it, to preserve capital and has made two distribution increases since. The yield is better than OXY at 1.9% and comes with a 100% distribution growth potential relative to the pre-pandemic levels. The company is not expected to bring the payment back to its former glory at once but may sustain the 40% CAGR in 2024 that it's run for the last two years.
The distribution payout ratio is less than 35% of the earnings, so there is ample room for substantial increases while leaving cash flow for repurchases and other needs. Schlumberger repurchased $213 million in shares, worth about 0.25% of today's market cap.
Kraft Heinz to Resume Dividend Increases in 2024?
Kraft Heinz is not expected to make a significant distribution increase in 2024, and it has yet to indicate that one is possible. Still, the internal metrics continue to improve, favoring such an outlook, and the analysts are also predicting an increase. The consensus is for a single penny increase at the end of 2023 or early in 2024, with the pace slowly increasing over the next few years. Supporting factors include the payout ratio, which fell more than 600 basis points in the last two years and is expected to fall again in 2024, and the outlook for cash flow.
Kraft Heinz's Q2 results were tepid relative to the analysts' expectations but continue to show improvement. There is a modest improvement in the top and bottom line results and a significant improvement in cash flow and FCF. Cash flow improved by triple digits on inventory reduction, restructuring charges, and leverage, while FCF improved by high triple digits for the same reasons. The company has yet to whittle down on its debt, but that will come soon, perhaps before the end of F23. Until then, shares of KHC trade at a deep value of 12X their earnings and yield about 4.75%.
