Ideally, when investing in income stocks, not only will you receive a great dividend but the company will have room for growth as well. Today we'll focus on one of the higher yielding companies in the oil and gas sector, Total SA (NYSE:TOT). Total offers a sizable yield, and there is potential for much higher profits over the coming years. Let's take a closer look at this company, and we'll see how it compares to some of the other high yielding companies in the sector.
The vast majority (80%) of Total's income comes from its exploration and production business (E&P), while the rest is split between refining/marketing and chemical manufacturing. Over the past decade, the company has done an excellent job of growing its revenues, and actually produced its best year ever last year, just topping revenues from the peak "oil bubble" year of 2008.
Unlike most of the other major oil and gas companies, Total actually has some pretty ambitious growth objectives for the next few years. For instance, the company has several projects in place intended to increase LNG (liquefied natural gas) production by 50% within the next three years. This keeps production low for the present time, while prices are depressed, but prepares for an anticipated market recovery. The company is also investing a large sum of money to modernize its refining and chemical operations all over the world, which should enable the company to run more efficiently going forward.
Yield: rising and sustainable
Total pays a very nice annual yield of around 4.6%, but more surprising than the yield itself is the relatively small portion of the company's profits it represents. The company has consistently kept its payout ratio under 40% throughout the past decade, with the only exception being in 2009, when earnings were pretty poor across the entire market.
The current annual dividend is $2.62 per year, which has been raised fairly consistently, although it doesn't always seem this way due to its dependence on the euro (one of the "risks" associated with owning a foreign dividend stock). The consensus calls for the company to earn $6.40 per share this year, so the payout should remain at a low 40% of the total profits.
Other high-yielding oil stocks
Total is by no means the only high-yielding oil stock, and there are actually several others with even higher yields. However, in terms of risk level and growth potential, most don't offer as good of a value. Two examples of this are BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS-A).
BP is actually a higher-yielding company with a 5.1% annual yield, but the legal uncertainties related to the Deepwater Horizon disaster are a cause for concern and create additional risk. There is really no telling how much the company will end up paying when all is said and done, and the legal proceedings could be hanging over the company for several more years.
Royal Dutch Shell pays 4.6% per year, but there is a lack of growth relative to other companies in the sector. Another article discussing yields in the oil sector details how the company has been raising its payout at a much slower rate than others sector leaders. Additionally, the company's total production has fallen for the past eight years, and although it is expected to rise going forward, this creates more of a "wait and see" situation for potential investors. In contrast, Total's production has grown and the company projects 3 million boe (barrels of oil equivalent) of production per day by 2017, a 30% increase over the current level.
Not only does Total have the potential for significant growth going forward, but it also offers a high yet sustainable dividend, among the best in the sector. Total definitely deserves consideration for any income stock portfolio that needs some energy exposure.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.