It goes without saying that 2014 was a terrible year for Big Oil. The energy sector was blindsided by the sudden, steep collapse in oil prices. Several companies across the energy space were forced to cutdividends to stay afloat. This might cast doubt on the energy sector more broadly. But income investors should take comfort in the fact that the integrated majors still pay reliable dividends.
One of the world's biggest integrated oil companies, Total SA , pays a 5% dividend yield that is near the top of its peer group and might even seem too good to be true. Fortunately, investors have little reason to worry about Total's payout.
Integrated structure provides shelter from the stormThe biggest ace up Total's sleeve is its status as an integrated major. This means Total has a downstream refining business to complement its upstream exploration and production operation. Upstream and downstream tend to do better during different operating climates. Upstream profits rise when oil prices rise, and vice versa. On the other hand, downstream activities tend to improve when oil prices decline.
When the price of oil falls, refining spreads tend to widen. This improves margins. and therefore profits. This is why most refining stocks are holding up extremely well during the oil crash. Total's downstream business made up 17% of its total adjusted profit in 2014. Earnings in the downstream and chemicals segment jumped 34% last year, which significantly offset the 16% decline in profit on the upstream business.
Thanks to the downstream contribution, Total held up surprisingly well last year. The company generated $12.8 billion in adjusted profit, which translated into $5.63 per share, a decline of 11% from the previous year. Declining profits are always disappointing, but things could have been far worse, considering the price of oil fell by about half in just a few months.
Capital discipline supports cash flowThe other big reason to be confident in Total's dividend is that the company is raising cash. Total's capital investments declined 21% last quarter, year over year. Separately, Total sold $1.2 billion worth of assets last quarter, including the Cardinal midstream assets in the U.S. and oil interests in Norway and Nigeria. For the year, Total sold $4.6 billion worth of resources, and the company plans to boost its asset sales to $5 billion in 2015. Capital spending is expected to decline by at least 10%, from $26.4 billion in 2014 to $23 billion-$24 billion this year.
Cutting spending will strengthen cash flow in future quarters. Also, raising cash from selling assets that are not deemed critical to the future will help keep dividends flowing, even while profits remain depressed amid the oil crash.
Dividend appears secureWhile investors have suffered a number of dividend cuts in the energy space in recent weeks, the integrated majors are havens of stability. Total generated more than enough profit to pay its juicy 5% dividend yield, thanks in large part to a balanced business model. In addition, Total has a conservative balance sheet: Its debt-to-equity ratio is a comfortable 48%.
Total's well-run business and strong balance sheet will secure its tantalizing dividend. This payout is as good as advertised.
The article Why Investors Should Love This Big Oil Companys 5% Dividend originally appeared on Fool.com.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Total (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.
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