Total SA: A Mixed Bag Dividend Play

| About: TOTAL S.A. (TOT)
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There are a lot of justified reasons why Total SA (NYSE:TOT) does not get a lot of love among conservative income investors:

  • The company pays an income tax rate of 55.0%.
  • The company carries $43.94 billion worth of debt on its balance sheet (for comparison, ExxonMobil (NYSE:XOM) carries $12.4 billion worth of debt on its balance sheet, and Chevron (NYSE:CVX) carries $12.3 billion worth of debt on its balance sheet). Although given the low rates, the debt payments are well covered when viewed in terms of the company's total cash flow.
  • The company's dividend does not grow in a linear fashion annually. From 2004 to 2005, the annual dividend declined from $2.19 to $1.83. From 2009 to 2010, the dividend declined from $3.28 to $2.93. And from 2011 to 2012, the dividend declined from $3.11 to $2.98.
  • And, of course, there's the main reason why Total shares trade at a depressed valuation: taxes. On one hand, you have the threat that the French regime will raise taxes on heavyweight corporations like Total SA even more, and on the other hand, you have to deal with the complicated tax withholding that is contingent upon whether you are a "declared" a U.S. citizen, and whether you hold your Total SA shares in a taxable brokerage account or a tax-deferred structure. The rules vary depending on your personal circumstances.

These are very big warts that should not be discounted. The act of investing comes with a lot of unanticipated bad news, and for a lot of investors, there is a minimal desire to take on a company with high debt that is paying high taxes (that could get raised even higher!) and does not offer linear dividend growth (and comes along with burdensome dividend taxation rules, particularly if held within an IRA).

The compelling thing about Total SA is this: if you get passed the high debt and burdensome taxes, you're looking at a very strong underlying energy business, particularly when adjusting for today's prevailing price of $50 per share.

If you look at Total's valuation through a typical website screener, you may be inclined to think that the company is trading at over 10.20x earnings, roughly in line with the other oil giants (Exxon and Chevron are both trading at 9-10x earnings).

But the $4.90 figure that you see in most website screeners understates the earnings for the oil giant due to one-time/non-recurring events.

When we speak strictly in terms of the company's earnings power (basically, removing the one-time events from the company's figures), you will see that Total SA generated $7.01 per share in earnings in 2012. Even more interestingly, the analyst consensus is that Total will be making $9.00 per share in 2016/2017. That's somewhat intriguing: in terms of current earnings power, Total SA is trading at an earnings yield of 14%, or a P/E of 7.13x earnings. Looking at the future projections, Total SA is trading at a forward P/E of 5.55x earnings in 2016/2017.

The appeal of owning a company like Total SA is that you will be reasonably assured that you will get a "chunk of income" each year relative to your initial investment, even though there is no guarantee that the income will increase each year (an investor in a company like Total SA should proceed with the full expectation that the dividend will get cut during periods of low energy prices based on the company's history and the nature of oil investing).

Total is one of those companies where a full appreciation of the company cannot be achieved by looking at a stock chart alone. An investor that bought shares of Total SA 10 years ago could have paid $35 per share. Now, the stock trades at $50 per share. Someone merely looking at the chart would be inclined to think that the stock merely gained 40-45% over the past 10 years.

But this is a company where the dividend (even when it gets cut) ends up accounting for a large chunk of the company's total returns. Each share bought at $35 per share would have generated $24.82 per share in dividends over the past decade, and would have generated an additional $0.76 in 2013, bringing the total to $25.58 as of today (of course, if you had your Total SA shares structured in a tax inefficient manner, the dividend returns would be much lower). From a value generation standpoint, each $35 share bought a decade ago would have generated $15 in capital appreciation plus $25.58 in dividends, meaning that each $35 each would have turned into $75.58 worth of value when you count everything.

And for Total investors that chose to reinvest their dividends over the past decade, they would have received a total of $31.76 in dividends over that time frame. This is why someone owns a company like Total: even though the company pays a high corporate tax rate, has to deal with a hostile government, carries a substantial amount of debt, and cuts the dividend from time to time, the underlying business of the oil company has still been strong enough to give investors 90% of their purchase price back in the form of dividends over the past decade.

Oftentimes, when discussing individual investing opportunities, I will point out that no given stock is right for everyone. This is especially true in the case of Total SA. If you own shares of Total, you are subject to political risk, and you will likely have to pay attention to French politics as part of monitoring efforts (essentially, Total SA is an excellent business that is domiciled in the wrong country and happens to carry a lot of debt). Additionally, you'll have to spend some time figuring out how the Total SA dividend tax affects your particular situation.

The right type of investor to own Total SA would be someone who wants to own something producing high income now, but does not like the stretched valuations in the high-yield markets. Total SA is one of those companies that is undervalued based on traditional metrics, unless you anticipate increased regulations/taxes from the French government or an upcoming decline in oil prices. The appeal of Total SA is that it would be an example of "yield-chasing" with a company that is both undervalued and will likely be with us for the long haul (Total SA has proven reserves of over 5.7 billion barrels of oil, and 31 trillion cubic feet of natural gas). If you're in the mood to make an investment that comes with a few warts, you could do a lot worse than Total SA in this environment.

Disclosure: I am long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.