In the world of Canadian stocks, there are plenty of high-flying picks to choose from that investors would guess would be the top pick of hedge fund managers around the world to own over the long term.
However, I was surprised to learn via my research that Canadian Natural Resources (TSX:CNQ) is actually the most-owned Canadian stock by U.S. hedge funds, with 81 such funds opening new positions in the resource giant over the past year.
In total, more than 600 hedge funds have a position in CNQ. Let’s dive into why that’s the case, and what institutional investors like about this name right now.
Strong business model
What I think is particularly compelling about CNQ relative to other major resource players is the mature nature of the company’s business model, as well as the cash flow growth profile the company has shown over the long term.
These factors, as well as a rock-solid balance sheet, have made CNQ a top dividend stock for long-term investors. Currently paying a yield of around 5.5%, with plans on raising this distribution as profitability grows, there’s a strong argument to be made that this is an excellent bond-like proxy for investors to latch onto right now.
With adjusted earnings per share of $0.62 this past quarter (beating estimates of $0.54 by a wide margin), CNQ’s profitability has continued to impress. As commodity prices have remained robust, and the company continues to focus on efficiency initiatives, I think there could be more to come on this front.
Solid capital return profile
Another thing I like about CNQ relative to its competition is the company’s total capital return profile. In addition to this robust dividend yield, Canadian Natural’s management team has dedicated 60% of the company’s free cash flow to both dividends and share buybacks.
So, if the company is able to produce outsized profits, investors should receive that back in the form of buybacks as well over time. That’s a potent combination that could lead to much higher capital appreciation and dividends (total return) than many in the market currently expect.
Strong cash flow generation, generous dividends, and a capital return profile that supports investors are all factors hedge funds ought to like. I’d argue retail investors like you and me should watch what the big money is doing.
