Undervalued dividend stocks have the potential to generate outsized gains for shareholders. For instance, generally, value dividend stocks offer investors a tasty dividend yield while trading at a massive discount to their intrinsic value. So, in addition to a steady stream of dividend income, long-term shareholders can also benefit from capital gains.
One such beaten-down TSX dividend stock is Cardinal Energy (TSX: CJ), which currently offers you a yield of 11.3%. Down 70% from all-time highs, Cardinal Energy is valued at $1 billion by market cap. Let’s see why I’m bullish on the TSX energy stock right now.
How did Cardinal Energy perform in Q3 of 2023?
Cardinal Energy is an oil and natural gas company with operations focused on low-decline oil in Western Canada. In the third quarter (Q3) of 2023, Cardinal Energy reported an adjusted funds flow of $81.2 million, an increase of 2% year over year. Its average production volumes in Q3 stood at 21,872 boe/d (barrels of oil equivalent per day), 1% higher than the year-ago period.
Moreover, Cardinal Energy reduced operating costs by 10% in Q3 due to lower power costs in Alberta and fixed power contracts entered in late 2022.
The company strengthened its balance sheet, decreasing its net debt by 19% or $14.3 million sequentially in Q3. Its net debt to adjusted funds flow ratio decreased to 0.2 times in Q3, allowing Cardinal Energy to allocate $30.3 million in capital expenditures.
Additionally, the company has entered into agreements to dispose of its non-core assets worth $32 million last year, the proceeds of which will be used to strengthen its financials.
A high dividend yield!
Cardinal Energy pays shareholders a monthly dividend of $0.06 per share, translating to a forward yield of more than 11%. While these payouts have risen from just $0.01 per share in 2018, they are down compared to the $0.07 per share payout in January 2015.
Similar to other oil and gas companies, Cardinal Energy is cyclical, and its cash flows are tied to energy prices. In a bull run, Cardinal Energy is positioned to expand cash flows by a wide margin. Alternatively, when oil prices fall, cash flows narrow, resulting in a lower dividend payout.
In the last three quarters, Cardinal Energy reported an adjusted funds flow of $189.7 million. In this period, it paid about $85 million to shareholders in dividends, indicating a payout ratio of less than 50%.
A sustainable payout ratio allows Cardinal Energy to reinvest in growth projects, lower balance sheet debt, and increase dividends.
What is the target price for Cardinal Energy stock?
Over the years, Cardinal Energy has managed to maintain low production decline rates. This enables it to have a higher cash flow due to the need for a lower capital requirement to maintain production levels.
Cardinal Energy also identified steam assisted gravity drainage as an area that could provide it with the opportunity to further decrease its decline levels.
Additionally, Cardinal Energy acquired the assets from Broadview Energy in early 2023, which should drive future cash flows higher.
Priced at less than eight times forward earnings, the TSX dividend stock trades at a discount of over 40% to consensus price target estimates.
