2023-04-13 13:44:15 ET
Summary
- Coterra Energy Inc. management has made an about-turn on capital allocation. Coterra's focus will no longer be on dividends.
- What will you do when the facts change? Change your mind or look for reasons why ''it's not that bad''?
- I'm committed to investing in natural gas companies, but Coterra Energy Inc. is no longer for me.
Investment Thesis
Coterra Energy Inc. ( CTRA ) was a stock I bought because of its high dividend yield . This is a natural gas company, but I didn't want to be invested in ''yet another'' natural gas company.
That's the key takeaway. I had a thesis. I had assumed that the company would continue down this path of rewarding shareholders with large dividends rather than through buybacks. But when facts change, I will change my mind.
Previously, Coterra could be counted on for around an 8% dividend yield (base plus special). Right now, investors should only hope for a 4% dividend yield (mostly made up of its base dividend).
Coterra's Capital Allocation Decision
Coterra had consistently stated that it would return 50% of its free cash flow as dividends, with the remainder coming back as buybacks or for paying down debt.
However, on the back of its Q4 2022 results, Coterra stated :
Due to market conditions and the value proposition of our shares, in 2023 we are realigning our strategy to focus on buybacks ahead of variable dividends.
The verbiage above is subtle. But keep in mind that Coterra's annual base dividend is $0.80, meaning it provides a 3.2% yield.
What's more, given where natural gas prices are right now, I can't imagine a scenario where this base dividend yield will increase in 2023.
Yes, natural gas prices are extremely low. And yes, natural gas is the bridge fuel for Future Energy, the great electrification of the world.
I understand all of this. My only issue is with the change in capital allocation strategy. This hardly exudes confidence in management's strategy.
When You Have to Change Your Mind
I've learned through experience, particularly bad experiences in 2021, that it's much better to be upfront and tackle bad news early, rather than wait for the circumstances to eventually turn.
I bought this natural gas company for one purpose. Because I wanted its high dividend yield of +8%. But I didn't want to have such a large proportion of my portfolio investing directly in natural gas.
I already own Antero Resources ( AR ). And I'm very bullish on Antero . But I recognize that my job is to think about diversification. I didn't want such a large proportion of my portfolio invested in the same risk factor. I believed that having a dividend portion of my portfolio would provide me with a steady cash infusion.
A long-term investment is a short-term investment that went wrong. I recognize that my original thesis changed. I will not squeeze myself to keep something that I don't fully want to own.
I consider myself the owner of the businesses whose shares I buy. And if management changes its capital allocation strategy as the wind changes, I don't feel I can trust this management when things turn sour. And at some point, they will turn sour.
I want to get ahead of the curve. To be proactive, rather than reactive. Ultimately, I can't invest in hindsight. I have to go with the facts available in front of me right now. It's entirely possible that Coterra Energy Inc. will flourish from $25, but I don't want to own anything when I don't fully believe in their capital allocation strategy. Executives that change their business strategy and capital allocation on a whim are dangerous.
It's better to get out of their way, while everyone is singing and dancing, rather than to wait for the market to turn against them.
The Bottom Line
Deep down, I believe that you'll agree this is the right thing to do. Even if it's a difficult investment decision.
Despite my highly vocal and outspoken bullishness for natural gas, it's important to deploy capital into companies where you are aligned with management's vision and can trust their capital allocation decisions. Again, I'm very bullish on natural gas, but it's important to me that I can trust my chosen management team to be a good fiduciary of the company's capital.
For further details see:
Coterra Energy: Did I Change My Mind? Yes