Canadian investors looking to beat the TSX Index can consider gaining exposure to quality dividend stocks with a growing payout. One such TSX dividend stock is Tourmaline Oil (TSX:TOU). Valued at $23.5 billion by market cap, Tourmaline Oil acquires, develops, and produces oil and natural gas properties in the Western Canadian Sedimentary Basin.
Tourmaline Oil went public in November 2010 and has since returned 340% to shareholders in dividend-adjusted gains. The TSX Index has returned “just” 201% in this period. Let’s see why TOU stock remains a top investment choice in October 2024.
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The bull case for investing in the TSX dividend stock
Lower commodity prices in 2024 have meant Tourmaline shares are down 26.5% below all-time highs. However, the pullback allows investors to gain exposure to a fundamentally strong company at a discount and benefit from outsized gains when market sentiment improves.
Tourmaline is a senior crude oil and natural gas exploration company. It began operations in 2008 and has since assembled an extensive underdeveloped land position with a large, multi-year drilling inventory and operating control of crucial natural gas processing and transportation infrastructure.
Tourmaline Oil is Canada’s largest natural gas producer and the fourth-largest Canadian gas processing midstream operator. With 75 years of drilling inventory, Tourmaline Oil claims to be the lowest capital-cost operator in the Western Canadian basin, which allows it to benefit from industry-leading cash flow growth.
A growing dividend payout
In 2024, Tourmaline Oil expects to report operating cash flow of $3.5 billion and allocate $2.2 billion towards capital expenditures, indicating free cash flow of $1.3 billion. Given its outstanding share count and an annual dividend of $1.40 per share, its dividend expense will amount to $520 million. Notably, Tourmaline also pays shareholders a special dividend, which depends on its cash flow generation.
In the last 12 months, its total dividends stood at $3.78 per share (which includes special dividends), translating to a trailing yield of over 6%. Moreover, its total dividend payout was much higher at $8.79 per share in the 12 months prior to July 2023, as it reported record free cash flow of $2.7 billion in 2022.
Tourmaline’s quarterly dividends have risen at a compounded annual growth rate of 23% in the last six years, enhancing the effective yield over time.
Is TOU stock undervalued?
Tourmaline expects its return on capital employed to remain over 10%, with base and special dividends offering a future income yield of at least 5% and additional upside during stronger commodity price environments.
Analysts tracking Tourmaline Oil expect its adjusted earnings to expand from $3.50 per share in 2024 to $6.55 per share in 2025. So, priced at nine times forward earnings, TOU stock is really cheap. Moreover, the energy stock trades at 18 times free cash flow, making it a top investment for value and income-seeking investors.
Analysts remain bullish and expect TOU stock to surge almost 30% in the next 12 months. If we account for its dividends, cumulative returns may be closer to 35%.
In summary, Tourmaline offers investors the opportunity to earn a steady return at a fair price while also receiving a market-leading dividend.
