Cenovus Energy (TSX: CVE) went public 15 years back and has significantly trailed the TSX Index. Since November 2009, Cenovus Energy has returned just 17% to shareholders, even after adjusting for dividend reinvestments. In this period, the TSX Index has surged more than 255%. So, let’s see if you should buy, hold, or sell CVE stock at the current valuation.
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Is Cenovus Energy a good stock to own right now?
Cenovus Energy has five primary business segments that include:
- Oil Sands – It develops and produces bitumen and heavy oil in northern Alberta and Saskatchewan.
- Conventional – The business is involved in extracting and processing natural gas and natural gas liquids.
- Offshore – It has interests in offshore gas projects located in China and Indonesia. The Liwan Gas project in China was the company’s first deepwater gas project in Asia.
- Manufacturing – The segment refines crude oil to produce diesel, gasoline, jet fuel, asphalt, and other products.
- Retail – The business markets its own and third-party refined petroleum products through retail, commercial, and bulk petroleum outlets and wholesale channels.
Valued at a market cap of $44 billion, Cenovus owns and operates a diversified portfolio of cash-generating assets.
In Q2 2024, Cenovus Energy reported an adjusted funds flow of $2.4 billion and a free funds flow of $1.2 billion, which suggests it allocated $1.2 billion toward capital expenditures. Its strong performance allowed Cenovus Energy to return $1 billion to shareholders via base and variable dividends, as well as buybacks.
Its quarterly dividend expense stood at $334 million, indicating a payout ratio of less than 20%. The company also paid variable dividends of $251 million in the June quarter. Cenovus has a quarterly dividend payout of $0.18 per share, translating to a forward yield of 3%. In May 2024, it also paid a special dividend of $0.135 per share, indicating a trailing yield of almost 3.4%.
Cenovus recently achieved a net debt target of $4 billion and will now return 100% of excess free funds flow to shareholders.
Is CVE stock undervalued?
Cenovus increased its full-year production guidance and downstream throughput guidance for 2024. It remains on track to invest at least $4 billion in capital expenditures in 2024, which should drive future cash flow and dividends higher.
Over the years, Cenovus Energy has maintained a conservative capital structure and robust balance sheet with a disciplined approach to capital allocation. However, despite its strong financials, the TSX energy stock continues to underperform the broader markets.
Analysts expect CVE stock to expand adjusted earnings per share from $2.12 in 2023 to $2.30 in 2025. So, priced at 10 times forward earnings, the TSX dividend stock is relatively cheap. Given consensus price target estimates, it trades at a 40% discount in October 2024.
The key takeaway
Cenovus Energy is a blue-chip TSX stock that offers you an attractive yield while trading at a cheap valuation. However, given the cyclical nature of the energy sector, CVE stock could struggle to outperform the major indices over time. Instead, it makes sense to gain exposure to Cenovus Energy by investing in a diversified ETF, which lowers overall risk.
