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Occidental Petroleum was the top-performing S&P 500 stock in 2022.
Callaghan O’Hare/Bloomberg
One of Berkshire Hathaway’s best investments in the past five years was its purchase of $10 billion of
Occidental Petroleum
preferred stock paying an 8% dividend yield.
Occidental Petroleum (ticker: OXY) could soon be in position to start redeeming that high-cost preferred, which was sold to Berkshire in the spring of 2019. At the time, Occidental CEO Vicki Hollub needed a lot of money quickly to help the company win a bidding war against the much-larger
Chevron
(CVX) for Anadarko Petroleum.
Preferred stock is a senior form of equity that resembles debt because the dividend rate usually is fixed. Companies can omit preferred dividends without causing a default, but generally can’t pay common stock dividends until preferred dividends are paid.
The redemption prospect figured in a downgrade of Occidental shares to Underperform from In Line by Evercore ISI analyst Stephen Richardson this week. Redemption amounts will likely hinge on oil and gas prices, which directly affect Occidental’s earnings. Richardson wrote Wednesday that the “Berkshire preferred mechanics” are a “headwind to higher cash returns” for common shareholders if energy prices rally.
That’s because the preferred redemption is keyed off a complex formula in which Occidental applies half of incremental shareholder returns (dividend and buybacks) above $4 a share in a 12-month period to pay off the preferred stock at a premium price of 110% of the face value. The other half of incremental…
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