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Total- An Inflation Hedged Income Opportunity?

May 05, 2010 | About:
crafool

What has Greece, Portugal, Spain, Euro and BP messes done for us? Could the answer be the perfect income opportunity for astute investors? Let me know your thoughts.

Total SA, the large French oil company, is currently just above its 52-week trading low of $49.78. Total, who's symbol is TOT, is trading at $50.34 per share with a dividend according to a 5/5/10 CNBC.com quote of $3.09 per share or around 6.07%. That is a nice spread over the new low yield offered by the 10-year Treasury Bond of around 3.55%, and close to spreads seen on junk bond rated senior bank loans. The yield is pretty nice in my opinion, but how is Total Valued?

Total has around $22.5 billion in long-term debt and around $17.5 billion in cash and short term investments, and this gives us around $5 billion of net debt ( There are around 2.223 billion shares outstanding or around $2 dollars and change of debt per share.). If we take Total's current stock price and add in the debt per share we see that the enterprise value comes to around $52 to $53 dollars per share.. Market Watch puts the median earnings estimates for this year at $6.06 per share and next year at $6.70 for earnings yields of around 11.65% and 12.64%, which of course was after Total paid taxes of around 55%. Pretty good earnings yields in my opinion. Looking again at current interest rates and where interest rates are likely to go over the intermediate term, I think the valuation/earnings yield of Total looks pretty good in my opinion, but what about yours?

If inflation unexpectedly kicks up or just comes along which a lot of smart people (i.e. Buffett) think is a likely outcome over the next few years given our elected officials lack of ability to do the right thing then one would expect the dollar to again fall and things like real assets like commodities to rise in value. Thus, I believe an important commodity like oil is likely to rise as well and give investors a possible hedge against inflation. What do you think? Of course Total isn't the highest yielding oil stock (Think BP) but of course they don't have a geyser of oil spill into the Gulf of Mexico either. Any feedback welcomed. Thanks have a great day.


Rating: 3.6/5 (5 votes)

Comments

buffetteer17
Buffetteer17 premium member - 3 years ago
While I don't think inflation is eminent, I do think it is something to worry about in 2-3 years. I'd like to make a long term leveraged bet on inflation, but cannot figure out how. The two obvious starting points are hard assets (land, oil, gold, other metals) and companies with pricing power. For leverage the obvious idea is to buy a call option. I suppose options on land are available with multi-year maturities, since home builders use them. But are they available in small amounts to individual investors? Futures are a possibility but do they go out far enough? Also there's the problem of contango. You can buy oil futures for next month around $80/bbl, but for next year the price is much higher. Standard options on companies only go out a couple of years. The ultra 2x and 3x ETFs are no good for this purpose, because volatility eats up their long term returns. Ideas welcome.
GigaBubble
GigaBubble - 3 years ago
Buff, go get a 30 yr loan and a builder who'll put in those hard audio assets you always wanted: e.g., http://www.genesisloudspeakers.com/ Will be harder to make that Porsche an integral part of a home :)

superguru
Superguru - 3 years ago
Inflation keeps coming as topic. In last inflationary period, what performed well, what did not?

We should let history guide us. I do not remember the last inflationary period

I have WIA and WIW (following Gate's Cascade) and considering buying i bonds and TIPS in an year.

how do you compare TOT to XOM as investments. TOT has better yield.
crafool
Crafool - 3 years ago
As many wonder about inflation, I keep coming back to what is described as the Austrian School of Economics' definition of inflation, which is as follows :

Too much money in the system and the symptoms of too much money in the system is evidenced by the rise in prices of the basket of goods and services we use everyday.

The recent volatility of the markets has an interesting impact on the our monetary and fiscal policies both here and abroad. It scares people into thinking that the different world economies will need to keep interest rates low for "an extended period of time". Japan just recently injected a further $2 TRILLION YEN into the system. The Federal Reserves idea of selling many of the assets it acquired the last few years is more than likely well OFF the table. Yes, the markets will be volatile however central bankers and politicians will try to mitigate it with easy money. Thus, I believe inflation is not here today, but it is coming and as James Montier of GMO recommends and I am summarizing- Buy Inflation Protection before it is clearly needed.

Total SA, represents in my personal opinion an opportunity for investors to buy a currently high yielding assets with a built in inflation hedge. The difference between it and Exxon is its extremely low valuation, however Exxon does have some compelling upside (Their purchase of XTO, a major natural gas producer when natural gas is hitting lows, is a great move.)and in full disclosure I own it along with Total.

I hope this helps and would like to hear from others. Happy investing.
fk
Fk - 3 years ago
Are TOT's dividends sustainable? Looking at their 10 year charts on gurufocus, their payout ratio (dividend/earnings) for 2009 is way more than 50%.

XOM's payout ratio is closer to around 35%.

BP's payout is a little over 50%.

For comparison, other company payout ratios:

nestle has been consistently< 30%,

Kraft is a bit over 50%,

PM and MO are way over 50%.

fk
Fk - 3 years ago
Another issue to consider for TOT and global stocks is the effect of foreign currency. Tweedy Browne runs two versions of their global funds, one that hedges for foreign currencies, one unhedged. I can't remember which guru said this, but he said something like the reason he's concentrated more on US stocks is because the effect of foreign currency conversion has eroded most of the gains he thought he had in his global stock picks.
superguru
Superguru - 3 years ago
as Euro is beaten down compared to USD, it may be getting good time for US people to buy euro based assets. When USD was beaten down, European investors were buying US assets on cheap.

TOT has low PE but much higher PEG compared to XOM as per Morningstar.

Let us see how the massive US style European response today changes things going forward.

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