Is This Canada’s Next Dividend Champion?

This company has increased its dividend elevenfold over the past decade.

The Motley Fool

oil sand miningFor years, Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) has been a favourite of growth investors chasing the company’s oil sands expansion.

Buoyed by rising oil sands production, Canadian Natural Resources has boosted its payout at a 27% compounded annual clip over the past decade, during which time the dividend has grown elevenfold. Lately, the hikes are getting even bigger. The most recent increase in May was more than 12.5%, a sign that management sees more good things ahead.

Admittedly, the company’s 2% yield might not be high enough to whet the appetite of the most discerning income investors. But given the company’s solid growth prospects, that payout will almost certainly continue to rise. For long-term investors who aren’t spooked by volatile oil prices, the stock could produce some handsome returns.

Canadian Natural Resources has a number of things going for it. It has one of the largest land bases of any energy company in the country, the best growth profile in the North American large-cap energy space, and higher prices for its oil sands bitumen.

Over the past decade, the company spent tens of billions of dollars to fund its oil sands expansion. Now that the firm’s main Horizon mega-project is nearing completion, most of those expenses are in the past. Bitumen is coming out of the ground, rather than just cash going into the ground.

The company’s first-quarter results highlight this trend. Adjusted earnings — which strips out a number of one-time items — more than doubled to $921 million, or $0.80 per share. Solid production growth and strong energy prices led to a 20% increase in cash flow over the fourth quarter of 2013.

That trend is expected to continue. Based on current commodity prices, management projects free cash flow to grow fivefold by 2018 to $5.5 billion. All of that is likely to be returned to shareholders in the form of rising dividends and share buybacks.

Not everyone is optimistic. Without the approval of TransCanada’s (TSX: TRP)(NYSE: TRP) Keystone XL pipeline, the discount for oil sands bitumen could increase. Cost inflation, especially for labour and materials, is always a looming threat.

However, even without the Keystone XL pipeline, bitumen is finding a way to buyers. Enbridge (TSX: ENB)(NYSE: ENB), Canada’s top oil shipper, has plans to quietly add one million barrels per day of export capacity over the next few years. These initiatives include clearing bottlenecks in the Chicago area, twinning the Spearhead and Seaway pipelines, and reversing its Line 9 route.

There are other exit avenues as well. Last year, TransCanada started pushing forward on its new Energy East proposal, which, if approved, would single-handedly replace Keystone. Shipping crude by rail has also emerged as an effective stop-gap until new pipeline capacity is built.

It’s also apparent that oil sands players have learned from their past mistakes, when rampant spending blew out development budgets. Suncor (TSX: SU)(NYSE: SU) has dialed back its expansion plans. Instead, the company has chosen less ostentatious debottle-necking initiatives — industry slang for wringing more production out of existing operations — to grow production rather than opening new mines.

Rivals Cenovus (TSX: CVE)(NYSE: CVE) and Imperial Oil (TSX: IMO)(NYSE: IMO) have also adjusted their strategies. Rather than commence dozens of mega-projects in one go, these management teams are opting to stagger the construction of new mines and roll out projects in stages. This should help keep the cost of labour and materials down in the future.

The risks aside, I think Canadian Natural Resources is going to become a cash flow machine. While the stock’s yield might be unimpressive today, investors can count on a number of large distribution hikes and share buybacks in the years to come.

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

question marks written reminders tickets
Dividend Stocks

Dividend Investors: Is BCE Stock a Buy Now?

BCE now offers a 7.9% dividend yield.

Read more »

A bull outlined against a field
Tech Stocks

Is a Bull Market Here? 4 Reasons to Buy Celestica Stock Like There’s No Tomorrow 

Celestica (TSX:CLS) stock has been a huge winner for investors this year, but there could be even more in the…

Read more »

Retirement plan
Investing

1 Retirement Savings Hack That Has Created Many Millionaires

Investors can retirement with $1 million in savings by investing in index funds such as the S&P 500.

Read more »

edit Taxes CRA
Dividend Stocks

CRA Money: 2 More Days to Boost Your Tax Refund!

Dividend stocks like Toronto-Dominion Bank (TSX:TD) can be great RRSP holdings.

Read more »

close-up photo of investor Warren Buffett
Stocks for Beginners

The Best Warren Buffett Stocks to Buy With $300 Right Now

These Warren Buffett stocks have long histories of growth, each offering their own reasons for why investors need them today.

Read more »

grow money, wealth build
Dividend Stocks

3 TSX Dividend Stocks With Yields Above 7% (But Are They Safe?)

These three dividend stocks all have ultra-high yields, making them some of the best to buy if you're looking to…

Read more »

oil and natural gas
Energy Stocks

3 Energy Stocks Already Worth Your While

TSX energy stocks could shine for much longer. Here's why Canadian Natural Resources (TSX:CNQ), Parex Resources (TSX:PXT), and another oil…

Read more »

Light bulb with jester hat perched on top
Dividend Stocks

3 Canadian Dividend Stocks With Payouts That Are No Joke 

Here are three top Canadian dividend stocks long-term investors would be remiss to ignore, particularly at these current valuations.

Read more »