EQNR - Equinor: Collect An 11% Special Dividend

Summary

• Equinor's Q4 results were very strong despite plenty of investor uncertainty.
• Undoubtedly, the key takeaway is Equinor's commitment to a strong capital allocation policy in 2023, 11% dividend yield (annualized).
• I make the case that Equinor is a very compelling bet. In sum, the need for European natural gas hasn't diminished by a few weeks of warm weather.

Investment Thesis

Equinor ( EQNR ) has seen its share price sell off in the past six months. However, I believe that its Q4 results have put a floor on its share price.

More specifically, I believe that investors will come to view Equinor's high dividends as incredibly attractive. Its high dividend is a sign of management's confidence in the health of its business.

In sum, in my opinion, there's a very compelling risk-reward in buying this stock.

What's Happening Right Now?

It's difficult to imagine that in the past six months, Equinor's stock price has sold off by nearly 15%. And yet here we are.

There are a few reasons why this stock sold off. In the first instance, the weather played a role. The other reason is that the anticipated massive demand didn't materialize. This led to LNG terminals becoming full to the point of saturation and as consequence, investors' appetite for staying with energy fizzled out.

What's more, with high beta tech stocks going ''to the moon'' as it were, there was a huge amount of rotation out of energy names.

Put simply, there became a view that the energy crisis was a 2022 problem. And that somehow the energy supply issues would somehow become solved without a need for further intervention.

I'm not saying that I agree with this insight, I'm only stating that this is the pervasive view. With that in mind, Equinor used its earnings call to remind investors of what's at play here.

Solid Returns of Capital, 11% Special Dividend

Equinor stated the following during their earnings call :

In a $70 Brent scenario, we expect to deliver a very strong cash flow from operations. On average around $20 billion after tax annually all the way to 2030.

Equinor didn't mix its words. Equinor let investors know that on an after-tax bottom line figure, Equinor was going to be printing some serious cash flows. And as a sign of confidence, Equinor also increased its dividend payout by 50%.

Furthermore, on top of this 50% increase in the base dividend, Equinor also offers investors of record on 12 May an additional special dividend of $0.60 per share.

Consequently, any investor now holding on to their shares will get an annualized dividend payout of 11%.

Here's the math, $0.30 * 4 for the annualized dividend, equals $1.20. Then, a one-off $0.60 special dividend. That's the equivalent of $3.60 if one annualizes the base and special dividends, or an 11% yield on the stock.

But Wait, There's More!

On top of the 11% dividend yield, Equinor is also committing to return $1.2 billion via buybacks. That being said, the buyback isn't so significant, after all, we are talking about 1% of the market cap being returned.

But it's the fact that despite natural gas prices in Europe fizzling out, Equinor is still committing to these high shareholder returns that is impressive.

EQNR Stock Valuation -- Best Way to Think About This

Natural gas is a very volatile energy commodity. Indeed, there are no guarantees to this trade.

It's not only that there are countless variables at play, from production and demand, to the interplay with alternative energy sources in Europe, including uranium (particularly in France) and thermal coal.

On the other hand, Equinor's cash flow guidance of $20 billion points to a stock that's priced at 5x cash flows. Again, for an energy source that's so vital, reliable, flexible, scalable, and cost-effective, I can't see how there's much justification for Equinor staying priced at this level for much longer.

The Bottom Line

Equinor's Q4 results are better than they appear. Particularly with regard to its future capital allocation policy. Equinor is intending to return the bulk of its 2023 cash flows back to shareholders via dividends.

According to my estimates, Equinor is priced at 5x this year's cash flows. In conclusion, I believe that this stock is really very cheap.

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