Canadian Oil Sands: Dividend Champ or Chump?

Investigating the health of this high-yielding oil sands company.

The Motley Fool

By Dave Van Geem

Today I’d like to look at Canadian Oil Sands to examine whether or not it is a good long-term dividend investment. You should already be comfortable with the company’s chance of being in business 10 (or more!) years from now, the inherent risk of the stock; hopefully you’ve also bought in at a valuation reasonable to you.

Now it is all about monitoring the investment to ensure a continuing flow of dividends to reinvest or fund your retirement. To that end, let’s look at three key things to get a snapshot of our stock:

  • Yield (increasing, decreasing or stable)
  • Balance sheet (adequate working capital)
  • Free cash flow (show me the money!)

Yield
Canadian Oil Sands is currently yielding 6.7% on a dividend of $1.40. The company converted from an income trust to a corporation on Dec. 31, 2010. Over the past two and a half years, the dividend has increased three times — from $0.20 to $0.35 a quarter.

Dividend Payments FY 2012 FY 2011 FY 2010
Q1 $0.35 $0.30 $0.20
Q2 $0.35 $0.35 $0.30
Q3 $0.35 $0.30
Q4 $0.35 $0.30

Source: Google Finance.

Balance sheet
Increasing dividends are always nice, but not if they come at the expense of strangling the future of the company by shortchanging capital investment and leaving managers unable to meet day-to-day expenses. One way to monitor this is through changes in working capital.

Working Capital

FY 2012 FY 2011 FY 2010
Current Assets $2,010 $1,246 $594
– Current Liabilities $1,117 $562 $456
= Working Capital $893 $684 $138

Source: Canadian Oil Sands annual statements. Figures in millions of Canadian dollars.

In its most recent fiscal year, Canadian Oil Sands’ cash increased $835 million along with increases to accounts payable of $225 and long-term debt of $365. Accounts receivable decreased $65 million.

Free cash flow
The balance sheet isn’t the only way to look at the health of your company — cash flow gives an idea as to whether the company can actually pay the dividends it promised. Canadian Oil Sands is producing good levels of free cash:

Free Cash Flow FY 2012 FY 2011 FY 2010
Cash flow from operations $1,864 $1,958 $1,295
– Capital expenditures ($1,086) ($643) ($582)
= Free cash flow $778 $1,315 $713

Source: Canadian Oil Sands annual statements. Figures in millions of Canadian dollars.

The verdict: Champ or chump?
With an impressive 6.7% yield at current prices, increasing working capital, and positive free cash flow, I’m tempted to call Canadian Oil Sands an unconditional Champ. Milton Friedman famously said there’s no such thing as a free lunch, and that is certainly the case here.

Canadian Oil Sands is in the midst of four expensive capital refurbishment projects. Takeaway capacity is constrained and the company faces higher labour and material costs as other oil sands producers compete for scarce resources required to finish these critical projects.

Finally, oil sands production sells at a discount to market prices. When you add in a payout ratio of 67% ($1.35 dividend divided covered by earnings per share of $2.02), this company’s high yield seems justified.

Want more dividend-paying stocks like COS in your portfolio? To help take the guesswork out of dividend investing, The Motley Fool assembled a Special FREE Report, “13 High-Yielding Stocks to Buy Today”. Simply click here now to receive a copy at no charge!

Dave Van Geem owns shares of Canadian Oil Sands as part of a diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Canadian Dollars
Stock Market

Where to Invest $5,000 in April 2024

Do you have some extra cash to spare? Here are five companies to invest $5,000 in next month.

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »