Canadian Dividend Aristocrats: Why CNQ and KEY Could Be Vital to Your Portfolio

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There are several dividend investing strategies that you can pursue as an investor. One of the smartest ways to invest is to look at dividend stocks with the potential for capital appreciation. It would help if you made sense of the chaos in stock markets. With rising inflation and a potential recession looming over our heads, building a portfolio that can guarantee passive income with the potential for increased growth is vital.

The two TSX Dividend Aristocrats in this article are stocks that have proven themselves over multiple economic headwinds and have emerged stronger.

Canadian Dividend Aristocrats: Why CNQ and KEY Could Be Vital to Your Portfolio

TSX Dividend Aristocrats To Buy

1. Canadian Natural Resources (CNQ)

Overview: Canadian Natural Resources is one of western Canada’s largest oil and natural gas producers. It has a diversified portfolio of assets in North America, the UK North Sea, and Offshore Africa. This global portfolio helps it tide over economic crises. It is a solid dividend paymaster.

Financials: For Q2 2022, Canadian Natural Resources reported net earnings of approximately $3.5 billion. EPS (Earnings Per Share) for the company came in at $3.26 compared to an estimate of $2.98. It paid dividends of $0.9 billion, incurred net base capital expenditures of $1.3 billion in Q2 2022, and still generated a cash flow of approximately $3.3 billion. It reduced net debt by around $1.4 billion. At the end of Q2, it had $12.4 billion in net debt.

Future Growth: As of December 31, 2021, Canadian Natural Resources reported the largest amount of natural gas reserves in Canada on a “proven plus probable” basis. The company says, “These reserves provide the Company with significant high-value growth opportunities for the Company and support long-term shareholder value.”

Canadian Natural Resources has seen strong execution with its natural gas drilling program as of June 30, 2022. It has drilled 22 net operated wells ahead of forecast. It has decided to step on the accelerator to capture additional value. For 2022, it has said it would increase its base capital expenditures by $200 million than initially forecasted. Base CAPEX will now be approximately $3,845 million. It will also increase its strategic growth capital to roughly $1,075 million, a $375 million over the original 2022 levels.

Dividend Payout and Price Target: The company has a forward dividend yield of 4.15%. It has a solid history of returning cash to shareholders through dividends or share purchases. Until August 3, the company has returned approximately $6.4 billion to shareholders: $2.4 billion through dividends and roughly $4 billion through share repurchases. The company said, “This includes the 28% increase to our sustainable and growing quarterly dividend in March 2022 to $0.75 per share, marking 2022 as the 22nd consecutive year of dividend increases.” AS its financial position continues to strengthen, it also announced a special dividend of $1.50 per share, paid on August 31.

The company added that in Q3 2022, it would allocate 50% of its free cash flow to share repurchases and 50% to the balance sheet.

The stock closed on September 2 at $72.27. The average analyst price for the stock is $91.7, a potential upside of almost 27%. When you factor in the dividend yield of 4.15%, Canadian Natural Resources can deliver returns in the 30% range. This stock is a no-brainer investment in this market.

2. Keyera Corp (KEY)

Overview: Keyera Corp. is one of Canada’s largest midstream energy businesses. It operates over4,000 km in pipelines. Its predominantly fee-for-service based business consists of natural gas gathering and processing, natural gas liquids (NGL) processing, transportation, storage, and marketing. Its NGL marketing business has been growing steadily and is one of the critical drivers for the corporate.

Financials: Keyera reported its earnings for Q2 2022. Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) came in at $316 million, compared with $224 million for Q2 2021. Cash flow from operating activities came in at $199 million, compared with $112 million in Q2 2021. Net earnings came in at $173 million ($0.78 per share), compared to $79 million for Q2 2021. EPS (Earnings Per Share) was $0.78 compared to an estimate of $0.52 and $0.36 in the same period in 2021.

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A large part of Keyera’s growth numbers has come in because of a better performance in its Marketing segment.

The company’s net debt to adjusted EBITDA ratio at the end of Q2 2022 was 2 to 2.3 times, lower than its target range of 2.5 to 3 times.

Future Growth: Keyera released a pathway to its EBITDA growth in its August investor presentation. It has a target of 6-7% for the same, which includes a ramp-up at several of its projects and expansion at Pipestone.

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Keyera’s guidance for 2022 includes a growth CAPEX of $680 million to $720 million. The company said the increase is “…primarily based on the higher estimated cost to complete the KAPS project. The majority of KAPS-related costs are forecasted to be incurred in 2022.” The project was over 70% complete as of Q2 2022.

Keyera is gung-ho on its marketing segment. It is expected to generate record cash flows. The CEO’s message to shareholders said, “With robust commodity prices and record iso-octane premiums generated in the second quarter, our Marketing segment is now expected to deliver between $380 million and $410 million in realized margin for the year.” In 2019, the segments generated a record realized margin of $373 million. This contribution will be vital in keeping Keyera’s net debt to EBITDA within its target range of 2.5 to 3 times.

Dividend Payout and Price Target: The company has an excellent forward dividend yield of 6.05%. The business is one of the most stable ones on the TSX. Keyera has increased its dividend at a CAGR (Compounded Annual Growth Rate) of 7% since 2008. That’s 15 straight years. It has a target payout of 50-70% of distributable cash flow, and this financial discipline is key to the company’s solid dividend.

Keyera stock closed at $31.71 on September 3, and the average analyst price for the stock is $36.46, a potential upside of 15%. Add the dividend yield and you’ll be looking at handsome gains in challenging markets.

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