Most income-oriented investors include oil supermajors in their portfolios for their attractive dividends. However, most investors focus exclusively on the American oil majors, Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). While these are high-quality companies with strong dividends, investors should also consider international oil stocks such as Total SA (NYSE:TOT).
Total possesses multiple competitive advantages and is growing production at a high rate. This should allow the stock to maintain and grow its impressive dividend.
Total is the fourth-largest oil and gas company in the world based on its market capitalization of $139 billion. Like the other oil majors, it is a fully integrated company. It operates in four segments: upstream, downstream (mostly refining), marketing and gas and renewables and power.
Total recently reported its financial results for the second quarter of the year. The company exhibited strong performance as it grew production 9% over last year's quarter thanks to the start-up and ramp-up of major growth projects. However, its average realized prices of liquids and gas fell 7% and 17%. Consequently, earnings per share decreased 20% over last year. Still, Total's growth prospects are looking quite attractive moving forward.
While Total has been hurt by lackluster commodity prices in the first half of the year, it has promising growth prospects. The company grew its production by 8% last year and is poised to grow it by another 9% this year. In addition, it expects to grow output by 5% per year for at least another three years. Moreover, we expect the price of oil to rise in the coming years thanks to healthy demand growth. Demand for oil products is rising by more than 1.0 million barrels per day every year and is poised to exceed 100 million barrels per day this year for the first time in history. This trend is likely to support the price of oil in the years ahead.
It is also important to note Total took advantage of the negative market sentiment that prevailed in the fierce downturn of the energy sector between 2014 and 2017. The company implemented a counter-cyclical strategy and acquired more than 7 billion barrels of low-cost, high-margin oil reserves. These reserves, which have a breakeven point below $30 per barrel, were acquired by Total at a price below $2.5 per barrel and, hence, they will reward the oil major with high returns. More precisely, the company expects to generate free cash flows higher than $4 billion from these reserves beginning this year. As Total generated free cash flows of $12.1 billion last year, it is evident the recently acquired assets will become major growth drivers.
Moreover, in May, Total acquired the assets of Anadarko (NYSE:APC) in Africa for $8.8 billion. The sale of these assets was a requirement for the takeover of Anadarko by Occidental (NYSE:OXY) to proceed. Thanks to the purchase of these assets, Total will leverage its expertise in liquefied natural gas in Mozambique and its expertise in deep-water drilling in Ghana.
Overall, Total has strong growth potential in the upcoming years thanks to its acquisition of low-cost reserves in recent years and an expected rise in future oil prices.
Pumping out cash flow and dividends
Total is offering a 5.6% dividend yield, which is much higher than the 4.6% yield of Exxon Mobil and the 3.8% yield of Chevron. Investors should also note Total is offering a much safer dividend than its peers thanks to its resilience to downturns. During the fierce downturn of the energy sector between 2014 and 2017, Total saw its earnings per share fall only 49%, whereas Exxon Mobil saw its earnings per share plunge 75% and Chevron posted a loss in 2016.
The key behind the superior behavior of Total was its refining segment. Before the downturn, the upstream segment of all the oil majors used to generate about 90% of their total earnings. Consequently, the other oil majors sold many of their refineries and invested the proceeds in their upstream business, thus failing to realize the refining segment was the hedge against a downturn in the business. Only Total retained most of its refineries. Therefore, when the price of oil collapsed, Total exhibited by far the most resilient performance in its peer group.
It is also remarkable that Total greatly benefits from an especially low tax rate on refining earnings thanks to France's tax code. This factor enhances the resilience of the company during periods of low oil prices, when the upstream earnings plunge and the refining segment generates most of the profits.
Finally, Total has greatly enhanced the safety of its dividend in recent years via the aforementioned acquisition of low-cost reserves. To provide perspective, its organic pre-dividend breakeven is below $25 per barrel ,while its organic post-dividend breakeven is below $50 per barrel. As it is very unlikely the oil price will dive below $50 and remain at such levels for years, it is evident Total's dividend can be considered safe. Overall, the company is offering the most attractive dividend among oil majors thanks to its superior yield and the safety of its dividend.
The stock price of Total has declined 20% in the last 12 months, primarily due to the 16% decrease in the price of Brent crude. As a result, the stock is trading at a price-earnings ratio of only 10.2. This is a remarkably cheap valuation, particularly given the resilient nature of this oil major. Total has traded at an average price-earnings ratio of 11.9 during the last decade. If the stock reverts to its average valuation level, it will enjoy a 17% boost in its stock price merely from normalization of its valuation.
While Total passes under the radar of most investors, it currently offers a 5.6% dividend yield, which is much higher than the yield of Exxon Mobil and Chevron. Moreover, the company's dividend is safe thanks to its resilient business model. Given the exceptionally attractive dividend and its low valuation, investors should consider purchasing the stock for income and growth.
Disclosure: I am personally long Exxon Mobil.
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