This Warren Buffett Stock Is at the Top of My TFSA Buy List!

Here’s why Suncor Energy Inc. (TSX:SU)(NYSE:SU) is a Canadian gem through the eyes of Warren Buffett and why TFSA investors should load up on the stock today.

| More on:

Image source: Getty Images.

Warren Buffett has been hoarding record amounts of cash.

Many investors see the move as preparation for a recession that may be just around the corner. While it’s always good to have dry powder on the sidelines in case the market implodes, it’s also vital to ensure you’re also adequately compensated in the event that such a downturn in stocks never ends up materializing.

Because if you’re playing only one side of the coin by prepping the entirety of your portfolio for a crash, you’re timing the market. And by doing so, you could get burned if the markets soar higher or remain stagnant for many years like the “great sag” that Ray Dalio has been warning investors of over the last quarter.

That’s why Buffett remains invested in many of his favourite names, despite Berkshire Hathaway‘s swelling cash hoard.

I don’t see one of his prominent Canadian bets, Suncor Energy (TSX:SU)(NYSE:SU), as a bet that the oil sands will suddenly rebound and make him rich overnight. Rather, I see his Suncor investment as a place to park cash and receive a large, growing dividend over the long term.

Buffett is a contrarian at heart, so it shouldn’t be a surprise to see the man initiate a position in an oil sands operator after most foreign investors have thrown in the towel on the entire space. Sure, Buffett is a stellar stock picker who seems to know where the puck is headed next, but what many other pieces fail to mention is that the man is also a king at allocating assets in a risk-averse fashion.

As you may know, Buffett is no fan of bonds with interest rates as low as they are. Bond coupons are meagre these days, and to do better than average, one must look above and beyond bonds to be able to better achieve excess risk-adjusted returns for one’s portfolio.

That’s where bond proxies come into play.

If I had to guess, Buffett sees Suncor as a bond proxy with a significant margin of safety now that most investors have fled Alberta’s oil patch.

It’s really anybody’s guess as to why oil prices are headed next or whether WCS can narrow the gap with WTI. What is for sure, however, is that Suncor has cash flow-generative, integrated operations that are stabler than most investors give the company credit for.

So, whether or not exogenous factors play out in Suncor’s favour, one will still collect a sizeable dividend (currently yielding 4.3%) that has the capacity to grow by low double-digits on an annualized basis. Add today’s severely depressed valuations into the equation, and you’ve got yourself a bond proxy with a dividend that puts most fixed-income securities to absolute shame.

Sure, Suncor is more volatile than the market with a high 1.42 beta, but one must remember that volatility is not necessarily equal to risk. The level of risk rises the more one overpays for a stock and given Suncor’s depressed valuation, there seems to be a significant margin of safety to be had with shares trading at just 5.6 times EV/EBITDA.

Buffett knows that bonds can be riskier over long periods of time, and that the opposite is true for stocks. That’s likely a large reason why Suncor is such an attractive bet at this juncture, regardless of where oil prices are headed next.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares).

More on Dividend Stocks

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »