1 Dividend Stock Down 34% to Buy Right Now

Undervalued dividend stocks such as Tourmaline Oil can help investors benefit from higher dividend and capital gains.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

After reporting record profits in 2022, several TSX energy stocks are trading significantly lower due to lower oil prices, sluggish consumer spending, and an uncertain macro environment. But the ongoing pullback allows you the opportunity to buy beaten-down dividend stocks and benefit from outsized gains when market sentiment recovers.

One such TSX dividend stock is Tourmaline Oil (TSX:TOU), which trades 34% below all-time highs, offering you a forward yield of 2%. However, if you account for the company’s special dividend, the effective yield is much higher. Let’s see how.

Created with Highcharts 11.4.3Tourmaline Oil PriceZoom1M3M6MYTD1Y5Y10YALL10 Feb 20149 Feb 2024Zoom ▾2015201620172018201920202021202220232024201620162018201820202020202220220www.fool.ca

An overview of Tourmaline Oil

Valued at $19 billion by market cap, Tourmaline Oil is the largest natural gas producer in Canada. It has an aggressive exploration, development, production, and acquisition program in the Western Canadian Sedimentary Basin.

Tourmaline Oil began operations in 2008. In the last 16 years, it has grown cash flows and earnings through strategic acquisitions, farm-ins, and land acquisitions, in addition to its exploration and development program.

Over the years, Tourmaline Oil has assembled an extensive undeveloped land position with a multi-year drilling inventory and operating control of crucial natural gas processing and transportation infrastructure in core growth areas.

A look at the dividend yield for TOU stock

In the third quarter (Q3) of 2023, Tourmaline Oil reported a cash flow of $878.5 million or $2.55 per share. Its free cash flow stood at $332.3 million or $0.96 per share. Comparatively, it pays shareholders a quarterly dividend of $0.28 per share, indicating a payout ratio of less than 30%. A low payout ratio allows Tourmaline to reduce balance sheet debt, reinvest in capital expenditures, target accretive acquisitions, and raise dividends further.

In addition to a quarterly dividend, Tourmaline declared a special dividend of $1 per share. If we include its special dividends, the company has distributed $6.52 per share in total dividends in the last year, raising the trailing yield to almost 9%.

Tourmaline Oil expects a free cash flow of $1.9 billion in 2023, indicating the stock is priced at 10 times free cash flow, which is very cheap. It ended Q3 with $880 million in net debt, which is not too high given the company’s robust cash flows.

Recently, Tourmaline Oil announced it completed the acquisition of Bonavista Energy for $1.45 billion. After adjusting for Bonavista’s volumes, Tourmaline Oil should end 2023 with 600,000 barrels of oil equivalent per day. The acquisition should drive future cash flows and dividends higher.

What is the target price for TOU stock?

In addition to its base dividend of $0.28 per share, Tourmaline Oil plans to pay four quarterly special dividends in 2024 while maintaining a net debt-to-cash flow target between 0.25 and 0.35 times.

Tourmaline Oil also aims to sell the Duvernay assets acquired pursuant to the deal with Bonavista Energy, the proceeds of which can be used to strengthen the balance sheet. In the last decade, TOU stock has returned “just” 17.5%, trailing the broader markets by a wide margin. But if we adjust for its dividends, total returns are much higher at 65%.

Due to TOU’s strong financials and cheap valuation, analysts remain bullish and expect the stock to surge roughly 50% in the next 12 months.

Should you invest $1,000 in Great-West Lifeco right now?

Before you buy stock in Great-West Lifeco, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Great-West Lifeco wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Tourmaline Oil. The Motley Fool has a disclosure policy.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »