Welcome to another Canadian Dividend All-star stock analysis by the Dividend Beginner. It’s about time I diversify away from REITs a bit more, and while energy is down across the board, I figured it’s as good a time as any to start the hunt for an attractive energy stock. CNQ caught my eyes with its incredible dividend growth prospects and is currently trading at a very attractive discount, especially when compared to other energy companies.
Why Am I Looking at CNQ?
The reason I’m looking at Canadian Natural Resources is primarily because I’d like to diversify into energy; the price of crude oil has been fluctuating quite a bit in the past month. Going up and down; and I think it may have bottomed out previously – though I have not done extensive research into energy specifically, I’d like another position other than Pengrowth Energy Corp (TSE: PGF), which has been very volatile, but provides me with a very nice 6% yield or so on my cost.
Before looking into CNQ and its specifics, let’s see if it’s the best choice when compared to other Canadian energy companies. After all, why settle when you can prosper?
Other Options in Canadian Energy
Considering Canada’s economy is heavily influenced by energy, oil & gas – especially in Alberta, there are a lot of companies to choose from. I’d like to take a look at a couple more before making a decision. This blog is a great way for me to just let loose on my own analyses and put my information in an organized place for me to compare, so I’ll be posting up whichever other energy companies I decide to investigate into.
The other companies on the Dividend All-Star list which have 10+ years of increasing dividends which can compete with CNQ are (and I’m not including pipelines): Empire Company Ltd, Ensign Energy Services, Imperial Oil, Suncor Energy.
Empire Company Ltd (EMP.A) currently has a dividend yield of 1.21%. Considering I tend to avoid companies which pay less than a 2% dividend yield, this one is a strike for me.
Ensign Energy Services (ESI) has a fantastic dividend yield of 4.08%, sadly this equates to a 278.43% payout ratio. Their P/E is 69.4, and the stock is now trading at a premium greater than 100% of its 5-year average 17. While the yield is great, I will not be chasing yield in this scenario.
Imperial Oil (IMO) pays out a 1.07% dividend, which is also below 2% and results in a strike for me.
Suncor Energy (SU) pays a 3.08% dividend yield, which is good. Sadly, this is a payout ratio of 178.35%, while their P/E is at 62, over a 100% premium.
I’m not saying any of these companies aren’t good. I have not done extensive research into any of them, but off the bat, CNQ has none of these problems here. And so, in comparison to these energy companies, I’d like to take a longer look into CNQ to see whether it is a good fit for my portfolio. Without further adieu…
About Canadian Natural Resources Ltd
A brief description of CNQ by CIBC Investor’s Edge reads as such: “Canadian Natural Resources Ltd is an energy company engaged in the acquisition, exploration, development, production, marketing and sale of crude oil, NGLs and natural gas. The Company’s principal core regions of operations are western Canada, the UK sector of the North Sea and Offshore Africa. The Company’s business produces namely: natural gas, light and medium crude oil, primary heavy crude oil, Pelican Lake heavy crude oil, bitumen (thermal oil), SCO and NGLs […]”
CNQ currently trades at $38.38. The 52-week range lies between a low of $31 to a high of $49.67. At $38.38, the company trades 23.81% above its 52-week low, and 22.73% below it’s 52-week high. It’s trading about halfway between it’s high and it’s low, then. Not the greatest place to be in, but not the worst either. It bottomed in between November – January and has been trading up and down and is currently on one of it’s down / side way shifts.
CNQ has a low trailing P/E of 13.8, which means its trading at a 34% discount relative to it’s 5-year average of 20.8. However, I’ll mention right now that my biggest fear and the largest reason that I haven’t already purchased shares in this company is due to its forward P/E of 100.1, a > 100% premium over its 5-year average of 18.5. Considering CNQ goes through the forward period unscathed and matches estimates, the share price could drop a lot to match a reasonable P/E around 18 to 20; if that were to happen I’d be paying a lot for the company now… but relative to past prices, it’s a steal currently.
And I’d say this is a perfect example of trying to time the market, which I want to avoid… I’d like some input from anyone on this issue. Have any of you ever made a call on purchasing shares where current P/E is great, but forward P/E is atrocious? It’s also possible that energy recovers and this estimate is completely out of whack.. And there’s some speculation.. OK, time to stop this and continue the analysis…
Thomson Reuters has placed a mean 12-month price target of $45.00 on the stock. This would represent a 17.7% gain in capital appreciation. They also have a Thomson Reuters Analyst Buy Recommendation, broken down as such: 2 Strong buy, 20 Buy, 1 Sell. Their 12-month high price target is $56.00 a share, and their low is at $32.00 a share.
Canadian Natural Resources Ltd pays an annual dividend of $0.92 per share. This payout represents a yield of 2.40%. This is not very mind-blowing, while it’s much higher than EMP.A and IMO, it is lower than ESI and SU.
While they pay out a 2.40% dividend yield, the 5-year yield average is, in fact, only 1.05%. The current yield is twice as much what it usually yields! Obviously this is due to the price being dropped down due to the energy crisis, and since they consistently increase dividends. Even while paying out double their average yield, their payout ratio remains at a meager 32.34%! This is great news, meaning that the dividend is not currently at risk and should be safe going forward.
CNQ has a 5-year dividend growth rate of 33.78%, which is amazingly high, and piques my dividend growth investing interest to a great degree. Even better, their 10-year dividend growth rate is 24.57%. The reason I say “even better” is because CNQ proves that it can remain consistent in its dividend growth whether it be 5 or 10 years – and still grow their dividend more than 20% averaged over 10 years. Considering this will be a long-term investment, I’d feel pretty comfortable betting my money is going to be working very hard for me in CNQ’s hands.
Now for my favourite part! The expected 10 year YOC given their current yield and 10-year yield growth… I’ll do the calculations given $2, 000; specifically since that’d be a value I’d be comfortable investing… So, given CNQ’s current 2.4% dividend yield and it’s 10-year average dividend growth rate of 24.57%, CNQ’s 10 Year YOC would be 21.86%! That is a monstrous YOC to acquire and would make any dividend growth investor proud.
Now let’s put this into perspective, in numbers a 21-year-old such as myself could understand and expect. I’ll use $2, 000 since that’s the amount I’d be willing to invest initially. Now, if we had $2000 worth of CNQ stock, at a 2.4% dividend yield, we’d receive an annual payout of $48 ($4 a month). Say you had the emotional tenacity to hold these shares for the next 10 years, and the luck to attain that 21.86% YOC, you would receive $437.20 ($36.43 a month) on the 10th year… You would receive 21.86% of your investment in that one year! This is a really good YOC, and one of my favourite reasons to want to own shares in CNQ today, and hold them long-term.
Canadian Natural Resources appears to be a very solid, rewarding long-term hold. They currently yield 2.40%, which is not high but not low either. Coupling this 2.40% yield with their 10-year average dividend growth rate of 24.57%, the 10 Year YOC of CNQ becomes a jaw-dropping 21.86%. The stock is currently trading at a P/E of 13.8, a discount relative to its 5-year average P/E of 20.8; however the forward P/E is insanely high at 100.1, an incredibly large premium compared to the average forward P/E of 18.5 – this is due to the lower price of crude oil and an estimated reduction in EPS growth. However, Thomson Reuters has set a Buy rating on the stock, and an estimated 12-month price target of $45.00, which would result in a 17.7% capital appreciation.
There is a whole lot to love with CNQ, and I would like to purchase shares after looking into future EPS just a little more. My only fear is the forward P/E, however it could be a blip in history, while the company is currently trading at an attractive valuation.
What do you guys think of CNQ? Let me know in the comments, I’d really appreciate it!
8 Replies to “Dividend Stock Analysis: Canadian Natural Resources Ltd (TSE: CNQ)”
I actually looked at CNQ pretty closely for a Canadian play. It met a good portion of my personal criteria. I personally decided to go with XOM instead, since they have a massive stake in Imperial. Gave me all the exposure I wanted to Canada. I really liked the Chowder number, and it looked pretty solid valuation-wise. I don’t know how CNQ will handle next year, as FAST Graphs says they’re going to take a massive earnings hit.
As for forward P/E, I mention it when I analyze a company, but I really don’t care about it at all. It can be slightly useful for judging entry points, but I look more at a company’s history to judge quality. Even if forward P/E spikes, if the company’s history says they can overcome it, I don’t get worried. And if the price does go down, I just buy more..
Yeah, CNQ appears to be a great stock excluding the forward P/E. I’ve been doing a bit more thorough research and agree that forward P/E is not as big a deal in this case as I may have originally thought it to be, considering CNQ usually delivers positive surprise results on its earnings as well.
I would have liked to invest in XOM actually, however, being from Canada, the conversion rate between CAD and USD is pretty steep these days so I’m staying away for the time being, at least until I set up a brokerage RRSP.
Thanks for commenting
Because it’s a heavily cyclical, the PE will be high at troughs and low at peaks in the commodity cycle. Good luck with this one!
That’s true; makes sense. I believe CNQ at current valuation is a good long-term hold stock and will reward investors with its consistent dividend growth.
Thanks for coming by!
I recently bought BP and would like to buy XOM as they have weathered the cycles before. The only caveat I have about continuing to buy US stocks here though (as a Canadian) is being behind on the CAD/USD FX.
We own CNQ in our portfolio and may add more to the position. We definitely like the dividend growth history.
That’s good to hear! The dividend growth history on CNQ is one of the greatest things the stocks going for it and really puts it in sort of a new league for Canadian div. growth stocks if I may say so.
I’m planning to make an original purchase on half of what I’d what to have in the company, and then probably add more if the stock price goes down / forward earnings regulates.
Thanks for visiting
excellent put up, very informative. I ponder why the other specialists of this sector do not understand this. You should continue your writing. I am sure, you’ve a huge readers’ base already!