Total SE (FP:PAR) Stock: Analysis

Total shares are traded on the Paris Stock Exchange under the ticker "FP". Total is a French oil and gas company whose origins date back to 1924 and which has more than 100,000 employees. It ranks fifth among the six supermajors, the largest companies in the sector worldwide.

Total share valuation

With the French giant having suffered losses in 2020 due to the Chinese virus, we will expressly set aside valuation ratios based exclusively on last year's profit. The stock is currently trading at:

• 16.34 times average recurring earnings: fair
• 0.98 times book value: cheap
• 1.45 times tangible assets: cheap
• 25.24 times the free cash flow of the last financial year: expensive, but explained by Covid
• 15.71 average free cash flow: correct

So far, the stock seems pretty cheap. Considering the negative price performance of the last few years, we can say that this is consistent.

Total share dividend

By focusing on the dividend, we can only be reassured in our choice, since it offers a very attractive yield of 6.7%! The company did not hesitate to increase it, despite last year's poor results, declaring itself "confident in the group's fundamentals". The dividend has thus increased by more than 4% per year over the last five years.

However, on closer inspection, despite the optimism of the management, not everything is so rosy. The degree of coverage of the dividend by the results raises some serious concerns, since it represents:

• 203% of current free cash flow (which can certainly be explained by the virus)
• 140% of the average profit of the last five years
• 130% of average free cash flow

There is no miracle. A very high dividend yield is almost always synonymous with a distribution ratio problematic.

Results and liquidity

While Total's earnings, dividend, cash reserves and asset values are rising over the long term, the French giant has already seen a decline in its net profit in 2019, before going into the red last year. This, among other things, explains the decline in the share price since 2018, well before the coronavirus-related fall.

Despite this, liquidity is sufficient, with a current ratio of 1.23 (up) and a quick ratio of 1.

Profitability and profitability

The gross margin is good, with 36.5% (also up). The free cash flow margin is more problematic, with 3.3%, but is explained by the health context. The same goes for the CFROA, with 5.5%.

Debt

Total considers itself to have "good financial strength". The long-term debt ratio to assets is still 22% (a sharp increase compared to the previous financial year). It is true that the total debt amounts to 0.73 times equity, which is still acceptable. However, the French company would need twelve years to amortize it using its free cash flow, which is far too much.

We had seen that the valuation of the stock seemed a priori quite cheap. Let's see what happens when we compare its fundamentals not to the price (capitalization) but to the enterprise value, which precisely takes into account debt:

• Current EV/FCF ratio: 36.22 => very expensive (but partly explained by the virus)
• Average EV/FCF ratio: 23.22 => expensive

This changes the situation considerably and confirms the warning already given by the dividend distribution ratio.

Return for the shareholder

Total has still managed to generate, thanks to the repayment of its net debt, an average annual return for the shareholder of 4.5% over the last five years. However, this should be put into perspective, because at the same time the company issued shares, representing a negative average annual return for the shareholder of -1.73%. In total, between the dividend, the repayment of the net debt and the issuance of shares, the average annual return for the shareholder amounts to a fairly impressive 10.4%. Be careful though, because as we saw for the dividend, the company used 165% of its FCF to finance these operations. It is a safe bet that in the future Total will no longer be able to be as generous to its owners.

Risks related to Total shares

The volatility of the FP stock over the last twelve months is acceptable, with 32%. The beta is at the market level, with 1. It is more from the point of view of the fundamentals that it is lacking, contrary to what the company claims. The Z-Score (Altman) is in the red zone, at 0.8, while the F-Score (Piotroski) is only 4. In summary, the company is financially unsound and the stock is likely to underperform in the future. The Z-Score even suggests that the company could go bankrupt. Obviously, that was due in the time of our ancestors, when bankruptcies still existed. Nowadays, with the policy of zero interest rates and central banks that buy up everything, Total still has a bright future ahead of it.

In short

Contrary to what a superficial analysis of the French giant might suggest, focusing only on the price variation or the incredibly generous dividend, the stock is anything but an opportunity. Let's note that institutional investors are jostling for position (despite their good greenwashing intentions), including: T. Rowe, BlackRock, Lyxor, Amundi, Vanguard, Norges Bank, BNP Paribas. I imagine that there will be quite a stir when one of them presses the red button...