TotalEnergies, the French energy giant, has always been a darling of dividend investors. With a history of consistent payouts and a current yield exceeding 5%, it's easy to see why. But a closer look at the company's recent financial data reveals a potentially troubling trend that could signal an impending dividend cut – a development that may have flown under the radar of most analysts.

The crux of the issue lies in the growing disparity between TotalEnergies' free cash flow and its dividend payouts. While the company has diligently worked to reduce its outstanding shares, primarily through buybacks, its free cash flow generation has been inconsistent and, in recent quarters, insufficient to fully cover its dividend obligations.

Take the first quarter of 2024, for example. TotalEnergies reported a free cash flow of -$1.24 billion, falling significantly short of the $1.9 billion it paid out in dividends. This trend of negative free cash flow extends to the full year 2023, where free cash flow stood at $23.4 billion, barely exceeding the $7.5 billion in dividends paid.

While the full year 2022 saw a healthier free cash flow of $31.6 billion, this figure was bolstered by a surge in energy prices following the geopolitical turmoil in Eastern Europe. Looking at the long-term trend, the reliance on extraordinary circumstances for sufficient free cash flow becomes apparent. This reliance paints a precarious picture for the future, particularly as energy markets stabilize and the geopolitical situation evolves.

The sustainability of a dividend hinges on a company's ability to generate consistent and sufficient free cash flow. When dividends consistently outstrip free cash flow, a company is essentially dipping into its reserves or taking on debt to satisfy investors, a strategy that can only be maintained for so long.

TotalEnergies' management has repeatedly emphasized their commitment to the dividend, even during the challenging periods of 2020 and 2021. However, actions speak louder than words, and the company's recent financial performance suggests a different story. The continued decline in free cash flow, coupled with the upcoming ex-dividend date of June 20, 2024, raises serious concerns about the dividend's longevity.

While TotalEnergies boasts a robust balance sheet with significant assets and a relatively low debt-to-equity ratio, the current trend is unsustainable in the long term. Management will need to make difficult decisions to address this issue.

They could choose to double down on their commitment to shareholder returns, further reducing outstanding shares through buybacks and maintaining the dividend at its current level. This approach, however, would require a substantial and sustained increase in free cash flow, a prospect that seems increasingly unlikely in the current energy landscape.

Alternatively, they could prioritize long-term financial stability by reducing the dividend payout to a level more aligned with their free cash flow generation. While this would likely disappoint some investors in the short term, it would ultimately strengthen the company's financial position and allow it to reinvest in future growth.

It's important to note that a dividend cut is not a foregone conclusion. TotalEnergies could surprise the market with better-than-expected earnings and improved free cash flow in the coming quarters. But the data, as it stands, suggests a need for caution. Investors should closely monitor the company's future earnings reports and pay particular attention to the trend in free cash flow and management's comments on their dividend strategy.

Free Cash Flow vs. Dividend Payouts

This chart illustrates the concerning trend of TotalEnergies' dividend payouts exceeding free cash flow in recent periods.

"Fun Fact: Did you know that TotalEnergies operates over 16,000 service stations worldwide? That's more than McDonald's restaurants! This vast retail network highlights the company's global reach and its important role in meeting the world's energy needs."