Valued at a market cap of $40 billion, Cenovus Energy (TSX: CVE) has returned less than 10% to shareholders in dividend-adjusted gains since its initial public offering 15 years back. In this period, the TSX index has returned more than 250%.
Cenovus Energy has significantly trailed the broader markets and trades at an attractive valuation in November 2024. Moreover, it pays shareholders an annual dividend of $0.72 per share, translating to a forward yield of 3.3%. Let’s see if this TSX dividend stock is a good investment right now.
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Is Cenovus stock a good buy?
Cenovus Energy develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada and other international markets. It has five primary business segments:
- Oil sands: It develops and produces bitumen and heavy oil.
- Conventional: It owns and operates multiple natural gas processing facilities.
- Offshore: It is engaged in the exploration and development activities.
- Canadian manufacturing: It upgrades heavy oil and bitumen into synthetic crude oil, diesel fuel, and other ancillary products.
- Retail: The segment markets refined petroleum products through retail, commercial, and bulk petroleum outlets.
Cenovus Energy is part of the highly cyclical oil and gas sector. Due to volatile energy prices over the last two years, the stock trades 44% below all-time highs.
In the third quarter (Q3) of 2024, Cenvous reported an operating margin of $2.4 billion, while operating funds flow stood at $2 billion. The company invested $1.3 billion in capital expenditures in Q3, which meant it ended the quarter with a free funds flow of $600 million.
Cenovus Energy pays shareholders a quarterly dividend of $0.18 per share. Given its outstanding share count, its dividend expenses in Q3 totaled $330 million, indicating a payout ratio of 55% which is reasonable. A sustainable payout ratio provides Cenovus Energy with the flexibility to consistently lower balance sheet debt and increase dividend payout each year.
Cenovus ended Q3 with a net debt of $4.2 billion, which is marginally higher than its $4 billion target. The company aims to invest between $4.5 billion and $5 billion in capital expenditures which should drive future earnings and cash flow higher, supporting consistent dividend hikes.
What is the target price for the TSX dividend stock?
Over the years, Cenovus Energy has invested in projects that generate returns even at the bottom of the cycle. So, the company can still maintain a net-debt-to-adjusted-funds-flow multiple of one if prices fall to US$45 per barrel. Its disciplined capital budget allocates resources to projects with high capital efficiency, while Cenovus continues to target accretive acquisitions.
Cenovus aims to increase its base dividend capacity to $2 billion by 2028. So, it will increase its dividend payout by 50% over the next four years, enhancing the yield at cost significantly. Cenovus emphasized that its base dividend and capital program will be fully funded over the long term at a West Texas Intermediate price of US$45.
Cenovus Energy trades at a forward price-to-earnings multiple of 10 times, which is not too expensive. Moreover, its price-to-free cash flow ratio is also attractive at 8.1 times. Analysts remain bullish on the TSX dividend stock and expect it to surge almost 50% in the next 12 months.
