Total SA: The Upshot of Not Really Cutting The Dividend

If I’m going to be critical of Total SA for giving up one of its competitive advantages (namely, selling off specialty chemical business lines that act as offsets to provide profits coming into the Courbevoie headquarters when profits are low), then it is only fair that I acknowledge what Total SA investors are getting as the benefit of the bargain for giving up some of its niche jewels.

First of all, Total SA investors get to continue collecting a dividend that remains largely intact. The highest dividend that Total SA ADR’s ever generated was $3.28 back in 2009. During the oil crunch period of 2014-2016, Total SA investors got to collect $3.16 per share in 2014, $2.73 per share in 2015, and an estimated $2.75 per share in 2016. It’s in quite the dividend growth line in the sand that you get with ExxonMobil, but it’s also a higher yield that gives you very large chunks of income that have remained largely intact.

One of the reasons why I cover energy investing so much more than the other sectors is because you don’t really need a whole lot of growth for the investment to perform well. Usually, the dividend yield is high enough that you only need mid single digit earnings growth over the long haul to pace the returns of the market. And so you quickly find yourself in the win-win situation of either (1) earning market rate total returns while receiving a much larger chunk of income than you’d get with most large companies, or (2) beating the S&P 500 by a few points when and if the historical trend of oil companies generating high single digit earnings growth proves true.

I have joked before that owning Total SA, BP, and Royal Dutch Shell is analogous to owning your own private oil well because the dividend payouts have been such a high percentage of your initial invested capital. As a matter of intelligent retirement planning, they are some of the best cash-generating holdings to shovel into an IRA because it is a backdoor way to get around the annual contribution limits. If you put $10k into an IRA each year, a base of Total SA, BP, and Shell can add $1k per year in dividends that are passively created and can be used to augment whatever else it is that you plan to purchase in the present moment.

Without any dividends reinvested, Total SA has generated $34.01 since 2005. It was only trading around $50 per share back then. This means that if you bought 200 shares of TOT for a $10,000 investment, you would have collected $6,802 in cumulative income.

That gives you some options. You could fund other investments, adding about $618 extra to each purchase that caught your eye each other. You could have let it pile up for a few years so that you could make a $10,000 investment that is funded in part by your Total SA dividends ($2,500) and in other part by your labor ($7,500). Once you get a foundation like this in place, you find yourself only putting in 75% work to get the same net effect.

Or, you could choose to reinvest. Those $6,802 in my example assumed that you just let the cash dividends pile-up for 11 years, a highly unrealistic and suboptimal use of capital. If you were aware that oil stocks tend to always trade at a bit of a discount compared to what they are worth, and if you want to pick up some more shares which will in turn pay out high dividends of their own, it could make a lot of sense to do absolutely nothing and kick back after pressing the reinvest button.

In this case, those $34.01 cash payouts would have actually been $39.43 per share in dividends as you got to collect dividends on the shares created by your dividends (specifically, you got to collect $7,886 over eleven years or 78.86% of your initial investment amount.) In this case, the average purchase price was $51.23 so you’re actually a bit lower than because you ended up with 154.6 shares worth $7,425. This is a function of oil trading at a lower price now than it did for most of the 2005-2016 period which has brought down the price of Total SA stock accordingly. But still, even acknowledging that adverse limitation, you still got to collect $0.74 on every $1 that you invested. If you’re looking for income, you’re not going to find many businesses that provide you many more absolute dollars than what you get with a stock like Total SA.

I think part of the reason why Total SA is such a high income producer is because it’s a bit of a hassle to get your hands. You have to deal with international taxation / tax treaties between the U.S. and France (or wherever you’re domiciled and France) and this might not be worth it for people that prioritize convenience. It also doesn’t pay out a predictably rising income stream, which might cause some income investors to self-select their way out of buying this stock.

But those obstacles and vexations are part of the reason why you get access to a top supermajor oil holding that will give you an extraordinary yield-on-cost if you spend 10+ years reinvesting the dividend. Even though I don’t consider the sale of the speciality chemical business to be in the best interests of long-term shareholders, there is a clear salutary effect to keeping the dividend mostly intact–namely, the absurdly high amount of income that you get to collect if you scoop up some TOT shares and keep the stock certificates permanently parked in your name.

Originally posted 2016-10-11 23:30:10.

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