November 5, 2024

Warren Buffett’s Top Dividend Stock: Why Occidental Petroleum is a Must-Buy While It’s Cheap

Grab This Warren Buffett Dividend Stock While It’s Cheap

The Energy Sector in Turmoil and Opportunity

The energy sector is witnessing a significant surge fueled by geopolitical tensions in the Middle East, causing fluctuations that ripple through global markets. Recent concerns regarding possible supply disruptions have driven crude futures (CLX24) up to one-month highs; however, fears arising from China’s economic slump have restrained short-term gains. In this increasingly volatile oil market, savvy energy investors are on the lookout for undervalued dividend stocks, and one in particular stands out: Occidental Petroleum (OXY), a company that has captured the attention of none other than Warren Buffett himself.

Buffett’s Endorsement: A Strong Indicator

While many stocks have struggled this year, Abbott’s driving investment strategy has centered around OXY. Underneath the surface of declining share prices—down 9.7% year-to-date and 16.3% over the past 52 weeks— lies a valuable opportunity. OXY’s stock has decreased 24% from its April highs, but Buffett continues to double down on this dividend stock, making it 4.3% of Berkshire Hathaway’s (BRK.B) equity portfolio, showcasing an investment worth over 27%. It’s clear that Buffet believes in OXY’s long-term potential, a sentiment that discerning investors would do well to consider.

Valuation Metrics Supporting OXY

Currently valued at $48.5 billion, Occidental Petroleum operates across exploration, production, and petrochemical manufacturing. It’s worth highlighting that OXY’s forward EV/EBITDA ratio is 5.55, notably below the energy sector median of 6.03x—a clear signal that OXY is undervalued compared to its peers. Additionally, its current valuation is a discount to its historical averages, meaning value-oriented investors might be looking at a rare opportunity.

In line with Buffett’s investment philosophy, OXY maintains its commitment to shareholder returns by offering a quarterly dividend of $0.22 per share, generating a yield of approximately 1.61%. While not the highest yield among its competitors, this dividend is a dependable income stream that can help cushion investors against market fluctuations.

Strong Financials and Strategic Moves

OXY’s financial performance remains robust. The company reported a net income of $1 billion in Q2 2024, or $1.03 per diluted share, alongside an impressive operating cash flow of $2.4 billion and free cash flow of $1.3 billion. Production numbers were favorable as well, exceeding expectations at 1,258 Mboed. Notably, Occidental’s OxyChem and midstream operations outperformed guidance, further solidifying its resilience.

What’s enticing is not just OXY’s commitment to traditional energy but also its foray into new markets. The recent joint venture with BHE Renewables, a Berkshire Hathaway Energy subsidiary, aims to tap into lithium extraction, crucial for the electric vehicle (EV) supply chain—signifying a future-forward approach while retaining its conventional oil and gas operations.

In a significant maneuver to bolster its financials, OXY completed the acquisition of CrownRock, L.P., enhancing its presence in the low-cost Permian Basin. This strategic balance between maintaining core competencies and exploring new ventures showcases OXY’s agile management.

Debt Management and Future Outlook

The debt situation, a common concern in the energy sector, has been well addressed by Occidental. The company successfully reduced $3 billion in debt during the third quarter of 2024. To sustain this financial momentum, OXY has strategically divested certain assets, including the sale of Delaware Basin properties for $818 million. This is part of a broader strategy to divest $4.5 billion to $6 billion in assets, effectively juggling debt reduction while financing future growth.

Analysts are generally optimistic about OXY’s prospects. They predict full-year 2024 earnings of $3.48 per share, a slight decline from last year, but an upward trend to $4.16 per share is expected for fiscal 2025. The consensus price target stands at $66.04, suggesting an enticing potential upside of about 22.5%. With 23 analysts weighing in, the consensus is clearly leaning towards a “Moderate Buy.”

The Bottom Line on OXY Stock

In summary, Occidental Petroleum (OXY) presents a compelling investment opportunity for those wishing to align their portfolios with Warren Buffett’s insights. With its solid valuation metrics, consistent dividend yield, and strategic maneuvers to improve financial health, OXY stands ready for potential growth in an evolving energy landscape. Those who recognize the energy sector’s volatility yet choose to invest wisely may find this Buffett-backed stock to be an overlooked gem. Grab this opportunity before the market adjusts!

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