Suncor Energy Inc. (TSX:SU)(NYSE:SU) and Crescent Point Energy Corporation (TSX:CPG)(NYSE:CPG) are core positions for income investors, and it’s easy to see why.
Both are blue-chip oil companies. Both pay out respectable dividends. And given the energy industry’s current doldrums, there has never been a better time to scoop up both of these stocks on the cheap.
But for those of us with limited funds to invest, it can be tough to choose between these two stocks. So, today we’re asking which energy giant is a better bet for income. Let’s see how they stack up against one another.
1. Yield
At first glance, Crescent Point is the obvious choice. Today, the stock yields 8.5%, which is more than five percentage points over Suncor’s payout. However, we have to dig a little deeper than that to analyze the quality of a dividend.
In addition to its normal distribution, Suncor uses its extra cash to buy back shares. That usually goes unrecorded by most popular investment websites like Yahoo! Finance. If you use a more holistic approach to calculating yield—including dividends and buybacks—Suncor’s payout jumps up to a tidy 5.6%.
How about Crescent Point? The company has a nasty habit of issuing shares to fund its dividend. If you factor in the equity dilution, Crescent Point yields less than 0.1%. Winner: Suncor
2. Payout growth
Of course, yield is just the beginning. Distribution growth is also important. Every year rising prices eat into our buying power, so we want to ensure our income stream can rise faster than inflation over time.
Over the past five years, Suncor has increased its distribution by a respectable 23% per year. That’s more than enough to keep up with rising prices. Crescent Point, in contrast, hasn’t hiked its payout once since 2009. Winner: Suncor
3. Earnings growth
You probably can’t expect those types of growth numbers in the future. Low oil prices are eating into the energy industry’s profits, so future dividend hikes will be muted. That said, analysts still expect Crescent Point to deliver respectable double-digit earnings growth over the next five years. Suncor’s profits are expected to remain flat unless oil prices move higher. Winner: Crescent Point
4. Safety
Yield and growth is fine and all, but as dividend investors the worst case scenario is watching our income stream dry up. That’s why dividend security is important.
That said, these payouts look sustainable in spite of today’s low oil prices. Both companies pay out about half of their fund flows from operations, which gives them plenty of financial wiggle room if the industry’s doldrums continue. Winner: Draw
5. Reliability
Suncor has mailed a dividend cheque to investors every quarter since 1992. Given that this period included three major recessions, I have confidence that the company will be able to crank out distributions through all the ups and downs in the energy industry. Crescent Point has a long track record of rewarding shareholders, too. However, the firm has only been mailing out dividend cheques since 2009. Winner: Suncor
6. Payout frequency
Dividends are great. But for those of us who rely on our portfolio to pay the bills, it can be tough to co-ordinate monthly expenses with quarterly payouts. Thankfully, some companies like Crescent Point have seen the value in paying dividends every month. That certainly makes managing a budget a little easier. Winner: Crescent Point
7. Valuation
My quick and dirty method to value a business is to divide a company’s enterprise value (the sum of its debt and equity less cash) by the firm’s earnings before interest, taxes, depreciation, and amortization (or EBITDA for short). Thankfully, the energy industry is out of favour with investors and some of these stocks are outright steals.
Today Suncor and Crescent Point both trade at around five times EBITDA, in line with peers but well below their historical averages. These low multiples could leave shares with some serious upside if any good news hits the oil patch. Winner: Draw
And the results are in…
As I said, Suncor and Crescent Point are both excellent oil companies. You really couldn’t go wrong by adding either one of these to your portfolio. That said, Suncor’s bigger yield and longer track record gives it the slight edge in my books.
