Investing in quality, beaten-down TSX dividend stocks is a proven strategy to generate outsized returns over time. As a company’s share price and dividend yield are inversely related, you can benefit from a higher dividend payout during periods of economic turmoil.
While the broader markets are trading near all-time highs, the rally is driven primarily by high-flying tech stocks. Alternatively, lower oil prices have meant that energy stocks are trailing the TSX index over the last 12 months.
The ongoing pullback in the oil and gas sector allows long-term income-seeking investors to buy and hold blue-chip dividend stocks in their equity portfolios. One top TSX stock is Tourmaline Oil (TSX: TOU), which is down almost 25% from all-time highs, increasing its dividend yield to over 5%.
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Is Tourmaline Oil stock a good buy right now?
Valued at a market cap of $24 billion, Tourmaline Oil is among the largest companies in Canada. Founded in 2008, TOU stock went public in November 2010. Since its initial public offering, Tourmaline stock has returned over 350% to shareholders in dividend-adjusted gains. Comparatively, the cumulative returns of the TSX index totalled 217% in this period.
Tourmaline Oil is part of the energy sector producing oil and natural gas in the Western Canadian Sedimentary Basin. Despite lower natural gas prices, Tourmaline ended the third quarter (Q3) with an operating cash flow of $742 million or $2.09 per share and net earnings of $355 million. The company allocated $591 million towards capital expenditures, suggesting its free cash flow totalled $152 million in the September quarter.
Given a base dividend payout of $0.35 per share, Tourmaline Oil’s quarterly dividend expense totals roughly $140 million. We can see that the company’s base dividend payout is sustainable even amid lower commodity prices. Moreover, the TSX giant continues to invest heavily in organic growth, which should drive future cash flow and higher dividend payouts.
In addition to a base dividend, Tourmaline Oil pays shareholders a special dividend tied to its free cash flow. When oil prices touched multi-year highs in 2022, Tourmaline Oil’s total annual dividends stood at $8.79 per share in July 2023, indicating a trailing yield of 13.8%, which is exceptional.
During its Q3 earnings call, Tourmaline announced a special dividend of $0.50 per share, bringing total dividends in 2024 to $3.25, indicating a yield of 5%.
What’s next for the TSX dividend stock?
A key driver of Tourmaline’s stock price is the company’s earnings growth. Over the past decade, Tourmaline Oil has expanded adjusted earnings at an annual rate of 12.1% despite multiple downturns in the energy sector. The TSX heavyweight plans to drill 365 wells in 2025 and increased its production guidance to 635,000 and 665,000 barrels of oil equivalent per day.
Analysts tracking the TSX dividend stock expect adjusted earnings to expand from $3.54 per share in 2024 to $6.07 per share in 2025. Meanwhile, its free cash flow is forecast to increase from $1.17 billion in 2024 to $1.4 billion in 2025. So, priced at 10.5 times forward earnings, TOU stock is cheap and trades at a discount of 25% to consensus price target estimates.
With strong operational performance and growing production, Tourmaline offers an attractive combination of growth and income. While natural gas prices remain a risk factor, the company’s efficient operations and widening dividend yield make it a solid investment option in December 2024.
