Normally, when I talk about stocks and charts, I’m referring to the ones that show the stock’s price action.
But today, I’m showing you a chart that is so spectacular, you’ll want to take a good look.
This chart represents the free cash flow for oil and gas driller Permian Resources (NYSE: PR).
You can see huge growth over the past few years. In 2025, free cash flow is forecast to increase by another 13%.
The stock currently yields 4.2% and its free cash flow growth is an important part of determining if the dividend is safe.
Let’s look at some of the other elements.
Last year, the company paid $467 million in dividends, for a low payout ratio of 35%. This year, dividends paid is expected to more than double to $1 billion. If the company achieves the $1.5 billion in free cash flow that is expected, the payout ratio will rise to 66% – which is still fine. I’m comfortable with a payout ratio of 75% or lower for most companies.
Permian Resources has a short but complicated dividend payment history.
It only started paying one in the fourth quarter of 2022. It paid a dividend that was part fixed and part variable. For example, last year it paid a $0.06 fixed dividend and $0.15 variable in the second quarter.
Beginning in the fourth quarter of last year, the company eliminated the variable dividend but raised the fixed payout to $0.15 per share.
One could argue that a decline from $0.21 in fixed plus variable dividends to $0.15 is a cut, but I’ve always viewed variable dividends as uncertain. In fact, if the company still paid a variable dividend the likelihood of a cut would be much higher since variable dividends almost always fall at some point.
But by moving to a fixed dividend, the company is expressing confidence in its ability to return capital to shareholders at a steady rate.
Given the strong free cash flow growth, the acceptable payout ratio, and a dividend plan that has been stabilized, Permian Resources dividend has a very low risk of being cut.
Dividend Safety Rating: A
What stock’s dividend safety would you like me to analyze next? Let me know in the comments section below.
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