Shares of Imperial Oil (TSX:IMO) have risen 94% in the last 10 years. But if we adjust for dividend reinvestments, cumulative returns are closer to 142%, higher than the TSX index, which has returned 131% since November 2014.

Notably, Imperial Oil has outpaced the TSX over a 20-year period as well, rising 516%, while the broader market has gained 414%. As past returns don't matter much for current and future investors, let's see if this blue-chip TSX dividend stock should be part of your equity portfolio in 2025.

Is Imperial Oil stock a good buy right now?

Valued at a market cap of $55 billion, Imperial Oil is among the largest energy stocks globally, engaged in the exploration, production, and sale of crude oil and natural gas in Canada. Despite lower commodity prices, Imperial Oil has showcased strong operational performance across business segments in 2024. In the third quarter (Q3) of 2024, its net income rose 10% sequentially due to record production in its Upstream business and a focus on cost efficiencies.

Imperial Oil reported earnings of $1.24 billion with an operating cash flow of $1.48 billion in Q3 of 2024, enabling it to offset a moderation in crude prices and refining margins. Its Upstream business reported a total production of 447,00 gross equivalent barrels per day in Q3 — the highest Q3 production over the past three decades.

The oil giant emphasized that its structural cost-reduction efforts and strategic volume growth helped drive unit cost savings of more than $3 a barrel year over year.

A growing dividend

We have seen that reinvesting dividends has allowed shareholders to benefit from sizeable gains over time. One reason is due to Imperial Oil's growing dividend payout. Today, Imperial Oil pays shareholders an annual dividend of $2.40 per share, which translates to a yield of 2.3%. These payouts have risen from $0.25 per share in November 1999, indicating a compound annual growth rate of 9.6% over 25 years, which is exceptional for a cyclical company.

In November 1999, Imperial Oil stock was priced at $11.5 per share. An investment of $5,000 in IMO stock 25 years ago would have let you buy 435 shares of the company, resulting in an annual dividend of roughly $109 over the next 12 months. Today, these 435 shares will pay you more than $1,040 in yearly dividends, enhancing your yield from 2.2% to 20% in this period.

Given an operating cash flow of $1.48 billion and capital expenditures of $486 million, Imperial Oil ended Q3 with a free cash flow of $1 billion. Comparatively, its dividend expense stood at $315 million, indicating a payout ratio of 32%, which is sustainable, even if oil prices drop significantly.

What is the target price for Imperial Oil stock?

In the last 12 months, Imperial Oil has reported a free cash flow of $3.6 billion and is forecast to end 2025 with a free cash flow of $4.5 billion. So, if the TSX stock is priced at 15 times trailing FCF, it will be valued at $67.5 billion in early 2026, indicating an upside potential of over 20% from current levels. After adjusting for dividend reinvestments, total returns will be over 27%.

Alternatively, Bay Street remains cautious and expects IMO stock to fall by 3% in the next 12 months.