Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows and ramps up shareholder returns.

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Remaining focused on the long-term can go a long way when trying to beat the TSX Index. This allows us to focus on the important things, like cash flow generation and balance sheets. So, while the TSX continues to impress, stocks that are backed by financial and operational excellence can outperform.

On that note, here’s a TSX dividend stock, Canadian Natural Resources Ltd. (TSX:CNQ), that fits the bill, oozing cash and returning a lot of that to its shareholders.

Why an oil and gas dividend stock like Canadian Natural?

Well, that’s a good question because oil and gas stocks are often extremely volatile due to swings in commodity prices. But Canadian Natural is different to a large extent.

Firstly, this energy stock has top-tier assets that provide the company with strong, predictable cash flows. The assets represent a diversified portfolio of high-quality natural gas, crude oil, and upgrading assets. They are long-life assets, with low decline rates and reserves that are expected to last 32 years. This means that there’s not a lot of capital investment required for exploration, and it ensures a reliable and predictable cash flow profile.

A dividend stock with a strong history

This brings us to the next point. Because of these quality assets and a healthy cash flow profile, Canadian Natural has been able to reward shareholders with a strong and growing dividend.

In fact, in the last 20 years, Canadian Natural’s annual dividend has increased more than 4,000% to the current $4.20. If we add that to the 1,000% capital appreciation of the stock over this time period, we can see the value of this stock as one to beat the TSX.

Looking ahead, things are likely headed in a bullish direction. Oil prices remain strong, at over $80, and this is driving continued strong cash flows at Canadian Natural. For example, free cash flow in the company’s latest quarter, Q4/23, came in at $2.5 billion – after dividends were paid. This extra cash has allowed CNQ to pay down its debt and today, the company has reached its debt target of $10 billion.

This is important because of the company’s plans to reward shareholders now that this target has been reached. Shareholders are now in a position to benefit even more from Canadian Natural’s strong cash flows, as 100% of free cash flow will now be allocated to shareholder returns through dividends and buybacks.

Beat the TSX with Canadian Natural

So, after seeing the kind of returns that Canadian Natural has given investors over the last 20 years, as well as its continued success, it’s very easy to conclude that it will continue to beat the TSX Index in the future.

This year, the company is expected to generate earnings per share of $7.60, compared to $7.74 last year. This decline is mostly due to oil prices. In the years ahead, depending on the oil price, CNQ’s earnings will likely grow predictably and steadily as production increases and cost decreases continue to take hold.

The company has beat expectations for the last few quarters, as it continues its better-than-expected performance. CNQ stock trades at a well-deserved premium to its peer group, with returns that are also above its peer group. In short, it’s well set up to beat the TSX Index in the years ahead.

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 Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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