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Canadian Oil Sands Ltd. Has an 8.25% Dividend Yield; Should You Buy Now or Bail Out?

Canadian Oil Sands Ltd. (TSX: COS) is down 28% in just the past three months and income investors who bought the stock for its generous dividend are wondering if they should hold on, add to the position, or just get out and use the tax loss to offset gains from other parts of the portfolio.

Let’s take a look at Canadian Oil Sands’ situation to see if now is a good time for investors to buy the stock.

Production difficulties

Canadian Oil Sands is the largest shareholder in the massive Syncrude oil sands project. Operational issues at the facility continue to hinder production and drive costs per barrel to uncomfortable levels.

There’s no other way to put it – 2014 has been a brutal year. The company recently reduced its production guidance for the third time, now expecting 2014 output to be 95-100 million barrels of oil. The initial guidance in January was 95-110 million. The reduction in April dropped it to 95-105 million, and a further reduction came in July, setting expectations at 95-102 million.

This isn’t a new problem for shareholders. Canadian Oil Sands also reduced guidance three times in 2013. Investors hoped the operational difficulties would be fixed for 2014, but that hasn’t been the case and the lack of consistency is not a good sign for investors.

Falling cash flow and lower earnings

Cash flow from operations in Q3 2014 came in at $302 million, down from $340 million for the same period in 2013. Net income for the quarter was $0.18 per share compared to $0.51 per share a year ago.

Higher operating expenses

Operating expenses for the third quarter were $385 million or $47.73 per barrel of oil. On a per-barrel basis, Canadian Oil Sands has one of the highest production costs in the industry.

Reduced capital expenditures

In the Q3 earnings statement, Canadian Oil Sands said the Milderd Lake Mine Train Replacement project should be completed and in service by the end of 2014. The Centrifuge Tailings Management project is about 90% complete, and the company expects it to be in service by the middle of 2015.

These projects have been a huge drain on capital and their completion should free up significant cash flow that could be used to support the dividend, at least in the short run.

Dividend history

Canadian Oil Sands pays a quarterly dividend of $0.35 per share that yields about 8.25%. The company has a history of slashing the payout when times get tough. The payout went from $0.20 in 2006 to $1.25 in 2008. The company then began a series of reductions that brought it back to $0.15 in 2009. A series of increases took it back to $0.50 in 2010, but new reductions in 2011 set the distribution at the current rate.

Should you buy?

At this point, new investors should probably look elsewhere. If you already own the stock, you could sell Canadian Oil Sands and use the loss to offset some capital gains from other stocks. If you believe oil prices are going to stabilize at current levels or move higher, then it could be worth holding the shares at this point, especially if you don’t have a tax reason for selling them.

If you prefer to invest in dividend-growth stocks with a strong history of distribution increases and capital appreciation, the following report is worth reading.

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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.

Fool contributor Andrew Walker has no position in any stocks mentioned.

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