I've been a longtime fan of (not to mention investor in) some of North America's leading energy producers. Many of these companies are firing on all cylinders, producing record earnings and free cash flow, while returning capital to shareholders with special dividends and share repurchases. And many are still attractive on a valuation basis.
However, one of Europe's oil majors, TotalEnergies (TTE 0.52%), is even cheaper than these attractively valued North American majors and it sports an even higher dividend yield.
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Worldwide and cheap
France's TotalEnergies is an integrated oil major with both E&P (exploration and production) and refining activities as well as a large chemicals business. It offers investors exposure to oil, natural gas, and renewable energy. The company's E&P operations span the entire world, with assets on six different continents. This diversification across business segments and geographies makes TotalEnergies significantly diversified and helps to lower its risk exposure to events in any one business or country.
TotalEnergies is incredibly cheap on a price-to-earnings basis, at just under seven times this year's earnings and under five times next year's projected earnings. This compares favorably with North American majors like ExxonMobil, which trades at a still cheap 11 times earnings and 10 times next year's projected earnings, or Chevron, which trades at a similar multiple of 11 times earnings and just under 10 times forward earnings.
Note that all of these energy stocks trade at a substantial discount to the average multiple of the S&P 500. Some discount is probably warranted given risks such as the possibility that France's government will levy windfall taxes on energy and shipping companies, and the company's exposure to Russia (it owns a 19.4% stake in Russia's largest LNG producer) but shares look attractive at these levels.
Shareholder return machine
After TotalEnergies increased its dividend 5% this year, shares yield roughly 5.5%, which is even higher than the already substantial dividend yields of North American majors like ExxonMobil and Chevron. Furthermore, TotalEnergies deserves credit for the fact that it didn't cut or suspend its dividend during the pandemic, an action that its European peers like Shell and BP undertook. U.S. investors would have to pay a foreign dividend tax on these payouts, but this is still an appealing payout.
In addition to this sizable dividend, TotalEnergies is also returning capital to shareholders via share buybacks, and it repurchased an impressive $2 billion worth of shares during the second quarter of 2022, following $1 billion of repurchases during the first quarter. The company also announced that it would allocate $2 billion toward buybacks in the third quarter and that this $2 billion number is a "floor" for the fourth quarter of 2022. These dividends and share repurchases are safely covered by the company's cash flow.
Some investors have been disappointed that TotalEnergies hasn't increased its dividend further in 2022, but this leads analysts from Bank of America Global Research to expect that the company will use its Investor Day in September to announce a larger and more formal share buyback program.
Eye on the future
TotalEnergies has the world's second-largest liquefied natural gas (LNG) after Shell. While some politicians and activists are calling for an end to fossil fuel use, most pragmatic observers realize that oil and natural gas are going to be a major component of the world's energy mix even as the world transitions to using more renewable energy. Furthermore, natural gas is an important "bridge fuel" during this transition, as it is a cleaner-burning fuel than energy sources like coal, making it a vital fuel for heating and power generation.
Demand for natural gas is expected to grow through at least 2030, so I like the fact that TotalEnergies has significant exposure to this commodity. In addition to its investment in natural gas, TotalEnergies is also preparing for the future by working to expand its presence in renewable energy. For example, TotalEnergies is investing in biofuels, solar energy and onshore and offshore wind farms.
TotalEnergies is a high-quality, diversified oil and gas play trading at a bargain bin valuation (even in comparison to other inexpensive oil and gas majors). And it's returning substantial amounts of capital to shareholders via its dividend and share buybacks. The company also has an eye on the future with substantial exposure to natural gas and investment in renewable energy, making it an attractive long-term buy.
