When yesterday’s news about a dividend hike surfaced from Chesapeake Energy Corporation (NYSE: CHK), our first thought was that the hike was too much at a time when natural gas is still somewhat less clear than oil as far as its future certainty.  After digging through the data on peers it turns out that Chesapeake can easily withstand this hike and we think a lot higher payout will come down the road.

For starters, Chesapeake Energy Corporation is the second-largest producer of natural gas in the United States. The common stock dividend is now 17% higher and will be $0.0875 per share quarter, which now generates $0.35 per year on an annualized basis.  Thomson Reuters analysts have a consensus price target objective of $38.58 on Chesapeake as well.

Earnings are not expected to be changed much in 2011 versus 2010 as Thomson Reuters sees consensus earnings at $2.94 EPS in 2011 versus $2.95 EPS in 2010.  For 2012, the consensus estimate is $3.19 EPS.  In short, Chesapeake is paying out only 12% of its income to common holders this year and only about 11% of next year’s earnings on a static basis.

This was the first dividend hike since June 2008 and Chesapeake has a market cap of almost $18 billion.  At $28.32, its 52-week trading range is $19.68 to $35.95 and shares hit a zenith peak during the energy boom of 2008 north of $60.00.  Shares traded between $30 and $40 for most of 2007.

If you think we are too optimistic about the dividend hikes ahead, don’t take our word for it.  CEO Aubrey McClendon discussed that this was not only the first hike in about three years and noted the board’s confidence in its “steadily strengthening financial position.”  More importantly came McClendon’s note, “It is our goal to be able to increase our common stock dividend regularly in the years ahead.”

There is at least one cautious take out there.  Based upon the news, Zacks has maintained a long-term Neutral and #3 Rank, which translates to a short-term Hold rating.

The dividend will be paid on July 15, 2011 to common shareholders of record on July 1, 2011.  With a payout ratio of 12% and 11%, even with the convertible preferred dividend there is more than ample room in the years ahead for Chesapeake to gun for higher dividends.  The old yield was about 1.0% and the new dividend yield is almost 1.25%.

JON C. OGG

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