Is the Woodside share price a buy for its 13% dividend yield?


The Woodside Energy Group Ltd (ASX: WDS) share price has seen a solid performance over the first six months of 2022, rising by 37%.

As a very large oil and gas business, it has benefited from the stronger oil price since the beginning of the Russian invasion of Ukraine.

Resource businesses like oil shares are often able to pay large dividends to investors when their relevant commodity price jumps higher, as it mostly just adds to profit because the costs of producing that resource are essentially the same (aside from government payments like tax) whether the price is a bit higher or lower.

The oil price is currently at an elevated price, though it’s down double-digits in percentage terms from two weeks ago amid concerns that a global recession could lead to less oil demand.

With the oil price currently above US$100 per barrel, does this mean that Woodside is a good business to consider buying for income?

Dividend expectations

The broker Ord Minnett thinks that at the current Woodside share price, it’s going to pay a grossed-up dividend yield of 13.6% in FY22 and then 8.6% in FY23.

Macquarie believes that Woodside could provide a grossed-up dividend yield of 15.3% in FY22 and 8.1% in FY23.

One of the biggest estimates of all comes from Morgan Stanley – it’s predicting that Woodside will pay a grossed-up dividend yield of 18% in FY22 and 16.4% in FY22.

By most accounts, those yields are big.

However, there is more to consider with an investment than just the dividend yield. If investors received a 15% dividend yield but then the share price fell 15%, then it’s back to square one.

Is the Woodside share price a buy?

Both Ord Minnett and Morgan Stanley believe that Woodside shares are worth buying. They have recently focused on the Woodside acquisition of BHP Group Ltd’s (ASX: BHP) oil and gas business.

Ord Minnett’s price target on Woodside is $37, implying a possible rise of around 20%. It likes the bigger scale created by the merger.

Morgan Stanley’s price target for Woodside is $40, suggesting a possible rise over the next year of around 30%. This broker also likes the benefits of the merger, while also suggesting that even after the Russian invasion ends, the price of energy will remain higher as Europe looks for alternate sources to buy energy from. The broker thinks that gas is very important for Woodside’s longer term.

However, Macquarie is less optimistic about the company. It’s neutral on the business with a price target of $29, implying a mid-single-digit drop. The broker believes that oil prices will fall in the longer term.

The business is also working on advancing its plans to invest in lower-carbon sources of energy that customers are seeking, such as hydrogen and ammonia.

It is making progress with its proposed hydrogen projects and has launched studies of large-scale energy and carbon capture and storage in Western Australia. It’s targeting $5 billion of investment in new energy products and lower-carbon services by 2030.

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