1 Magnificent Canadian Stock Down 23 Percent to Buy and Hold Forever

CNQ stock is cheap and trades at a discount to consensus price target estimates.

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Crude oil prices are falling as investors worry about slowing demand and the possibility of an upcoming recession. The pullback in oil prices has driven the valuation of TSX energy stocks lower, allowing you to buy the dip. Canadian Natural Resources (TSX:CNQ) is one such magnificent TSX stock, down 23% from all-time highs that you can buy and hold forever. Let’s see why.

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An overview of Canadian Natural Resources

Valued at $92 billion by market cap, Canadian Natural Resources explores, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids. It offers synthetic crude oil, light and medium crude oil, and bitumen. Moreover, the company’s midstream and refining assets include two crude oil pipeline systems and a 50% working interest in an 84-megawatt cogeneration plant.

In the last 20 years, Canadian Natural Resources has returned over 700% to shareholders. However, if we adjust for dividend reinvestments, cumulative returns are much higher at 1,300%. Despite its market-thumping gains, CNQ stock offers you a tasty dividend yield of 4.7%, given its annual dividend payout of $2.08 per share.

While Canadian Natural Resources is part of the cyclical energy sector, its low-decline asset base has allowed the TSX giant to raise dividends by more than 20% annually in the last two decades, significantly enhancing the yield at cost.

The bull case for Canadian Natural Resources stock

Canadian Natural Resources is among the world’s largest oil and gas companies. Around 56% of its reserves are high-value synthetic crude oil, light crude oil, and natural gas liquids. It also has Canada’s largest crude oil and natural gas reserves and is the only company with more than five billion barrels of oil equivalent.

CNQ’s low maintenance capital expenditures allowed it to end 2023 with a free cash flow of $6.9 billion after dividends. We can see that the company has enough flexibility to target acquisitions, raise dividends further, and lower its balance sheet debt, all of which should enhance shareholder value. With a net debt of $10 billion, CNQ will allocate 100% of its free cash flow towards dividends and stock buybacks.

In the last three years, CNQ has reduced its net debt by $11 billion and allocated more than $20 billion to shareholders via dividends and buybacks. Its stable cash flow stream has allowed Canadian Natural Resources to increase dividends yearly for the last 24 consecutive years.

In the second quarter (Q2) of 2024, Canadian Natural Resources reported adjusted net earnings of $1.9 billion and adjusted funds flow of $3.6 billion. The company’s growth story is far from over, given its capital expenditures in the last 12 months have totalled $2.7 billion. A steady expansion of its fixed assets should translate to higher cash flow, earnings, and dividends going forward.

The Foolish takeaway

A lower pricing environment in the second half of 2024 might drive earnings lower in the near term. This suggests that the company might not continue raising dividends by double-digit percentages if oil demand falls drastically. However, priced at 12 times forward earnings, CNQ stock is cheap and trades at a 30% discount to consensus price target estimates.

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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 Aditya Raghunath 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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