One of the main draws for holding Total SA (NYSE: TOT ) is the high dividend yield that the company offers. The other draw is its staggering rise in the stock market lately, as shares of the company have risen by over 16% since the beginning of the year. Given this performance and hefty dividend payment, is it still a good idea to hold shares of the company? How does this company measure up to other oil companies such as Chevron (NYSE: CVX ) ?
Profitability, dividend, and cash flow
In terms of profitability, Total tends to present a slightly lower operating profit compared to Chevron, as presented in the chart below.
This slightly lower profitability didn't stop Total from paying its investors a relatively high dividend yield, which comes to nearly 4.6%. The company also raised its dividend payment for the last payment for last year by 3.4%. In comparison, Chevron's dividend yield is only 3.5%.
In another recent Fool article, the author discusses Total's high yield and its downside due to foreign withholding taxes; this could partly reduce the yield. If, say, an American investor has to pay France's withholding tax of 30%, this yield falls to 3.2%, which is slightly below Chevron's dividend yield.
Chevron is also able to translate a higher portion of its revenue to operating cash flow. In 2013, the company's operating cash flow to revenue ratio reached 16%, while Total's ratio was 13%.
Based on the above, even though Chevron offers its investors a lower dividend, the company's operations are slightly more profitable. Over time, this will result in a higher value.
Higher burden of debt
From a balance sheet perspective, Total is at a bit of a disadvantage as it has a higher burden of debt: As of the end of March 2014, Total's debt-to-equity ratio stood at 0.48. However, the company is in the midst of a three-year program (2012-2014) of divesting between $15 billion and $20 billion worth of assets. This move is likely to reduce its debt burden.
On the other hand, Chevron's ratio was only 0.15. This difference means Total has a higher financial risk. Nonetheless, the current 0.48 ratio isn't a notably high figure and it's reasonable to see an oil company taking on more debt to finance its future growth and capital expenditure.
Growth and capex
Last year, Chevron maintained relatively flat production. This year, it expects a rise in production, including increases from the company's Brazilian subsidiary and Petrobras, which started to produce oil from Papa-Terra's floating production at the end of last year. Moreover, during the first quarter of 2014, the company also saw an increase in production in Nigeria, Angola, and the United States.
Meanwhile, Chevron plans to keep its capital spending at $40 billion -- slightly lower than its $41.8 billion capex in 2013.
Total plans to increase its operations in the coming years so that its upstream segment's production reaches 2.6 million barrels of oil equivalent per day by 2015 and 3 Mboe per day by 2017. Since the company's production was around 2.3 Mboe per day in 2013, this outlook means Total expects a 13% rise in production by 2015. While the company expects higher production, it also slightly reduced its capex from $28 billion in 2013 to $26 billion in 2014.
Based on the above, both companies plan to augment their production in the near future despite their reduced capex.
Even though Total SA offers a high dividend yield and expects a rise in production in the near future, people who seek to increase their exposure to oil related investments should also consider Chevron. Compared to Total, Chevron offers a slightly lower dividend but has smaller financial risk and more profitable operations.
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