With energy prices mostly trading sideways for the past few years and worldwide economic growth being slow, times have been rough for Big Oil. Despite these unfavourable market conditions French power house Total SA remains one of the best dividend paying investments of all large oil companies.
Total (EPA:FP) is a major energy player, active in over 130 countries and almost every sector of the oil and gas industry. With a market cap of over €100 billion and sales exceeding €189 billion in 2013 the French oil giant is the fifth-largest publicly-traded international oil and gas company in the world.
After an internal reorganisation in 2012, the company now builds its activities around the following business segments: Upstream, Refinining & Chemicals, and Marketing & Services. Even though the actual dividend history of Total is hard to track down because of mergers, currency changes and stock splits, France’s second largest corporation has been paying dividends consecutively since 1945. Ever since the introduction of the Euro in 1999 the company has not reduced its dividend.
With its current yield of 5.07%, Total offers the highest dividend yield among its peers. Because the company changed to a quarterly dividend in 2011, shareholders currently receive a quarterly dividend of €0.61 or €2.44 annualized. Because of the already high yield and sluggish revenue growth the five-year dividend growth rate is only 0.86%, whereas the ten-year DGR is over 8%. The payout ratio remained well under 60% for over five years.
Although oil prices have been going sideways since 2010 and are at a nine-month low despite geopolitical turmoil in Ukraine and Libya, Total succeeded in keeping its production and profits stable in 2012 and 2013. Regardless of the fact that business prospects for the near future are not especially bright given the current state of the economy, Total can rely on a reserve replacement rate of over 130% for the past five years.
This means that the French discovered more sources of oil than they pulled from current known reserves. According to its 2013 fact sheet, Total can continue its operations for another 13.7 years without discovering any new oil reserves. Even though Total raised some eyebrows because of its partnership with Lukoil (LON:LKOH) to develop shale gas fields in Russia, the future should bode well for Total and its shareholders.
At its current price of €47.33, investors are rather bearish about the stock, trading 25% below its peak in 2007 and 13.49% below its 52-week high. Because the EPS were €4.11 in 2013, the current P/E ratio is only 11.5. As such, it seems Total is reasonably undervalued.
When considering all of the above Total looks like a great addition to any dividend growth portfolio because of its high yield and operational stability. Even though the stock has traded as low as €40.41 in the past year the current price with its 5.07% yield is still a great entry point.
International investors should, however, be mindful of France’s 30% withholding tax on dividends which also applies to the ADRs listed on the NYSE. Even though most of you will be able to recover at least half of any withheld taxes, double taxation and yield loss is something you should consider before buying into Total.
Despite the revenue loss, I’m a buyer at current prices – even though I have to pay an extra 25% tax to the Belgian treasury on top of the French withholding tax. How about you?