The integrated oil majors can be good for growth as well as a steady, increasing dividend income. However, with the rise in most U.S. equities over the past several years, and the economic challenges in Europe, some of the European oil majors pay far better dividends than American counterparts such as ExxonMobil (NYSE:XOM) or Chevron (NYSE:CVX). Both are very well-run companies that have produced above-average returns for their shareholders for decades. But for a more income-oriented approach, it may be a good idea to consider a European oil major such as Total SA (NYSE:TOT).
Total is based in Paris, and is the world's fifth-largest publicly traded oil company. The company operates in more than 130 countries, but the bulk of its sales (about 71%) come from France and the rest of Europe, with the rest mainly from Africa and North America. Total has proven reserves of about 11.4 boe (barrels of oil equivalent), which represents a reserve life of about 13 years, given the company's current production rates. Impressively, Total's reserve replacement rate (the rate at which it adds to its reserves relative to the rate at which it extracts cruse oil) has been an average of 110% over the past eight years, which implies a tremendous amount of sustainability for the company's oil production.
Going forward, Total has several things going for it that should allow the company to grow its revenue (and its share price). Industry experts project production growth of 2% to 3% per year for the foreseeable future, as well as more efficient operations from a restructuring of the company's downstream business. Total has recently merged its refining and chemicals operations, which will create synergies and allow much more effective operations.
As a result, Total's earnings are expected to grow from $6.46 to $6.97 in 2014, a 7.8% annual gain. This also means that Total trades for just 8.8 times forward earnings, which is excellent for such a great dividend payer that is in excellent financial shape.
A question of yield and growth priorities
Both the American and European oil majors are very good investments, but each is good for a specific investment objective. If your priority is growing your principal over time, an American company (based on history) is probably the better bet. If current income is more of a priority, while still maintaining the potential for some growth, the European oil majors may be the way to go.
To illustrate this point, let's compare what an investment in these companies could do for you over a period of time. For the sake of this comparison, let's say you put $100,000 each into ExxonMobil and Total for a 10-year period. We'll use the average annual returns and dividend increase data for the past 20 years. Over that time period, Exxon's share price grew by 9.5% per year on average, while Total's grew by 8.1%. In terms of yield, Exxon raised its dividend by 6.8% each year on average, as compared to 11.3% for Total. Using this data, let's see what this could mean for you over 10 years.
After 10 years, a $100,000 investment in Exxon, based on historical averages, would more than triple to a value of $315,850 assuming all dividends are reinvested. Your dividend income stream would be $16,330 annually at that point, or 16.33% of the original investment.
During the same time period, despite the lower gains in share price, the compound effect of dividend reinvestment would produce a $401,175 value for an investment in Total, with an annual income stream of about $52,572.
Now, this is a very hypothetical situation involving historic averages to predict future returns, which will most likely not be consistent over the next 10 years. This example simply illustrates the effect of a company that makes maximizing its dividend a priority.
So, what to do?
As you can see, which oil major is right for you depends on your investment objectives. For those of us who would prefer to have higher current income, particularly for dividend reinvestment, Total is an excellent option that should provide nice growth and excellent income in the years ahead.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Chevron and 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.