The purpose of this article is to discuss Total S.A. (TOT) and its attractiveness as an investment option. Specifically, I will look at its past and current financial performance to try to determine if the stock has room to move higher, and if the company is in a position to maintain, or even raise, its high-yielding dividend.
To start, a little about TOT. TOT is a France-based integrated international oil and gas company. With operations in more than 130 countries, TOT engages in all aspects of the petroleum industry, including oil and gas exploration, development and production, and operations such as refining, marketing and shipping. TOT operates various subsidiaries, including Total Venezuela, Total E&P Nigeria SAS, and Total E&P USA, Inc., among others. Some of the company's top competitors include BP (BP), Exxon Mobil (XOM), Chevron (CVX) and Royal Dutch Shell (RDS.A).
My main reason for looking at TOT is because it has a mixed past performance and I want to attempt to determine if this is an investment that makes sense for dividend-seeking investors. TOT currently has an attractive yield and has done well in the short term. TOT is currently trading at $50.54/share in the U.S. and has a dividend of $.76/share, paid quarterly. This translates in to an annual yield of close to 6%. Over the past 52 weeks the stock is up over 8%. However, YTD the stock is down close to 3%, which is of great concern to me given the strong performance of the market. Over a 5 year period the stock is down close to 40%, and its current dividend yield, while impressive, is paying an amount per share that is less than half what it was as early as May 2011.
To get a sense as to where the stock might be headed, I reviewed the company's most recent annual report.
Some key metrics point to a company with bright future. From 2011 to 2012, total sales were up strongly, over 8%, net operating income was up almost 10%, and earnings per share were up over 7%. This helps explain TOT's strong performance over the last year. However, first quarter results were not as impressive, and help to explain the stock's lagging performance year to date. These same metrics were all down in Q1 of 2013 when compared to Q1 of 2012 by rates of 6%, 5%, and 7%, respectively. Part of the reason for this decline is the company's location in France, a major source of concern for me. My investment theme is to look for U.S. based companies with international exposure. A French based company which relies heavily on Europe for its performance does not fit this bill. With regard to refined sales, almost 65% come from the European region, indicating TOT is heavily exposed to the economic performance of Europe. European stock markets continue to underperform the U.S., and demand for TOT's products was historically weak, the main reason given by TOT's CEO for the declining performance.
At this point in time, I am not inclined to bet on a European recovery. The weaker nations are incapable of bailing themselves out, and the stronger countries have little political will to do so. With slowing growth and renewed vows for austerity, I do not expect the performance of TOT to be far much better in Q2 than it did in Q1. With falling sales and income, it would be unlikely that the company would choose to hike its dividend in that environment. Given that TOT does not have a consistent history of raising, or even maintaining, its dividend, I am not optimistic about its prospects. While the yield is currently attractive, I would approach it will caution.
Essentially, I am wary of companies right now based on Europe. The political environment there is unstable at best, and corporations like TOT are subject to high levels of taxation, which could become higher. TOT had an effective tax rates of 62.7% for its upstream operations and 58.8% for its group operations. These rates are much higher than they would be for U.S. based companies, or companies in any other part of the world for that matter. Plus, while I do not expect corporate tax rates to rise in the U.S., Europe is another matter entirely. Such a rise could further erode the profitability of investing in TOT's stock.
Finally, when compared to its peers, TOT does have a higher dividend yield. However, its PE ratio of over 10 is higher than some of its nearest competitors. For instance, BP, XOM and CVX have current PEs of 6, 8, and 9, respectively. Thus, investors would be paying a more expensive price to gain access to this yield. As I mentioned, since this dividend does not have the most impressive track record, I would be hesitant to pay up for that exposure.
Bottom line: All investors should have some energy/oil/gas exposure. With an increasing demand for energy and natural resources, those companies that control these resources stand to benefit from growing middle classes around the world, strong performance in emerging markets, and a shrinking supply of oil and gas reserves. TOT is a global company with a higher dividend yield that has rewarded recent investors. However, long-term performance of the company has been weak, and the company is overly reliant on Europe's economy, a region of the world that is heavily regulated, has high taxes, and is struggling to find a way to combat both debt and declining growth. Since many of TOT's main competitors have outperformed the company with regards to share price, have more stable dividend track records, and operate in a more certain regulatory environment, I would urge investors away from this investment option and towards one with a less cloudy future.