Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let’s take a deep dive.

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Canadian Natural Resources (TSX:CNQ) has long been a favourite among dividend-focused investors, and there’s good reason. The company’s dividend yield is currently around 4.52%, which is attractive compared to other stocks in the oil and gas sector. However, beyond its dividend yield, potential investors should consider its recent performance, revenue, and growth opportunities to assess whether it’s a solid buy at this point.

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Into earnings

In the third quarter (Q3) of 2024, CNQ stock reported some mixed results. Revenue came in at $8.89 billion, down about 10% from the previous year, thus reflecting some challenges in the broader energy sector. However, its profit margin actually improved to 26%, up from 24% the previous year, largely due to lower expenses. This boost in profitability shows that CNQ stock has effective cost controls, which is always a good sign for dividend sustainability.

Earnings per share (EPS) in Q3 hit $1.07, slightly down from $1.08 in Q3 2023, yet still beat analyst estimates by 17%. This demonstrates resilience in CNQ stock’s operational performance, especially given the volatility in oil and gas prices. For dividend-focused investors, this stability is a big plus, as it suggests that the company can continue to pay out its attractive dividend, even during challenging quarters.

Dividend support

Speaking of dividends, CNQ stock’s payout ratio stands at about 59.03%, which is fairly conservative. Therefore, the company is using just over half of its earnings to pay dividends, leaving room for both reinvestment and potential dividend increases. Historically, CNQ stock has been known for its commitment to rewarding shareholders, both through dividends and share buybacks. This is evident in the $1.9 billion returned to shareholders in Q3 alone.

A recent development that could enhance CNQ stock’s cash flow potential is its increased use of the Trans Mountain Pipeline. Starting in December, CNQ plans to ship an additional 75,000 barrels per day through this pipeline. This additional capacity allows CNQ stock to tap into higher-value markets, particularly in the U.S. and potentially Asia. This could boost future profits and sustain dividend growth.

More growth to come

Another consideration is CNQ stock’s ongoing acquisition strategy. In Q3, the company agreed to acquire Chevron Canada’s interest in the Athabasca Oil Sands Project and other assets. This acquisition will add valuable assets to CNQ’s portfolio and potentially contribute to higher earnings and free cash flow down the line — both important factors for dividend security and growth.

One factor that potential investors might want to keep an eye on is CNQ stock’s debt. Although the company is well-capitalized with a total debt-to-equity ratio of 28.87%, its total debt of $11.52 billion is substantial. However, CNQ stock’s operating cash flow of $14.77 billion comfortably supports this debt load, so it doesn’t pose an immediate risk to the dividend.

Bottom line

Despite a dip in share price recently, CNQ stock is trading close to its 50-day moving average of $47.36 at writing. For investors looking for income, this slight pullback could offer a buying opportunity, especially if you’re bullish on oil prices rebounding as we head into winter and demand increases.

CNQ stock appears to be a strong buy for dividend-focused investors who appreciate a steady yield and some potential for growth. Its strategic moves to expand market access and acquisitions could help offset some sector-wide revenue challenges. And its disciplined dividend payout provides a reliable income stream. As always, it’s wise to watch for any changes in oil prices or further updates from CNQ’s operational side. Yet, for now, CNQ stock looks like a solid addition to an income-focused portfolio.

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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 Amy Legate-Wolfe 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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