Canadian Natural Resources (TSX:CNQ) has been one of the most popular stocks among TSX investors in the past two decades. Valued at more than $105 billion by market cap, CNQ is among the largest companies in Canada. Armed with a diverse portfolio of assets in Canada and other international markets, CNQ explores, develops, and sells crude oil, bitumen, natural gas, and natural gas liquids.
While CNQ is part of a cyclical sector, it has returned close to 1,000% to shareholders in the past two decades. After adjusting for dividends, total returns are closer to 1,730%, outpacing the broader markets by a wide margin.
Despite its market-thumping gains, CNQ currently offers shareholders a forward yield of over 4%, given its annual dividend payout of $4.20 per share.
Let’s see if this TSX dividend giant is a good buy right now.
The bull case for CNQ stock
CNQ’s asset base is backed by long-life, low-decline production, which accounted for 73% of total liquids production last year. Most of this production was zero-decline high-value SCO (synthetic crude oil) from CNQ’s oil sands mining and upgrading assets. The rest was derived from the company’s top-tier thermal in situ oil sands operations.
The combination of these assets and CNQ’s efficient operations results in sustainable adjusted funds flow across the commodity price cycle.
Despite an uncertain and challenging macro environment, CNQ strengthened its balance sheet, provided significant returns to shareholders, and strategically developed its assets, achieving record annual production in 2023.
The energy heavyweight emphasized it continues to grow its reserves organically on a total proven and total proven plus probable basis with reserve replace ratios of 166% and 194%, respectively.
Canadian Natural Resources will invest $5.4 billion in capital expenditures which should drive future cash flows and dividends higher.
How did CNQ perform in 2023?
In 2023, Canadian Natural Resources reported net earnings of $8.2 billion and operating cash flow of $12.4 billion. Its adjusted funds flow stood at $15.3 billion, while free cash flow was $6.9 billion. The company paid dividends worth $3.9 billion and invested $4 billion in base capital expenditures.
CNQ ended 2023 with a net debt level of $10 billion, after which it will return 100% of free cash flow to shareholders. In the last three years, Canadian Natural Resources reduced net debt by more than $11 billion, paid $11 billion in dividends, and repurchased shares worth $10.5 billion.
After accounting for debt reductions and shareholder distributions in the last three years, CNQ has returned $30 per share to investors.
The company’s board of directors recently approved a 5% increase to CNQ’s quarterly dividends. Notably, it has raised dividends for 24 consecutive years at an annual rate of 21%.
In the fourth quarter, CNQ’s adjusted funds flow stood at $4.4 billion, while dividend payments were $1 billion, indicating a payout ratio of less than 25%. We can see Canadian Natural Resources has enough flexibility to raise dividends higher and reinvest in growth projects.
Priced at 13.2 times forward earnings, CNQ stock is quite cheap and trades at a marginal discount of 2% to consensus price target estimates.
