Canadian savers are searching for reliable stocks to put in their TFSA retirement funds.
The strategy makes sense, especially when dividends are used to buy additional shares. Over time, the compounding process starts to really make a difference, and the initial investments can grow to be large cash piles.
Investors often search for market leaders that are market leaders and have the ability to growth revenue and cash flow over time. This provides support for dividend growth.
Diversified business units
Suncor is Canada’s top integrated energy company with assets located all along the hydrocarbon value chain. The oil sands operations and the offshore production facilities represent the largest part of the business and that is where most of the growth potential lies.
The company recently completed the Fort Hills and Hebron developments, and those two sites are ramping up to capacity production ahead of schedule. Suncor’s share of production at Fort Hills averaged 70,900 barrels per day in Q2 2018. Hebron contributed an additional 13,500 barrels per day. The two new assets helped boost year-over-year production growth for the quarter.
Suncor also operates four large refineries and a network of more than 1,500 Petro-Canada retail locations. These downstream assets provided a nice hedge against weaker margins in the production operations during the oil rout. This is part of the reason the company’s stock held up better than most of its peers in recent years.
The rebound in oil prices is helping drive improved numbers. Suncor generated funds from operations of $2.86 billion in Q2 2018 compared to $1.63 billion in the same period last year. Net earnings came in at $972 million compared to $435 million.
Dividends and share buybacks
The transition of the Fort Hills and Hebron projects from development to production should take some pressure off the capital program and free up more cash to distribute to shareholders.
Suncor raised the dividend by 10% for 2018 and recently increased its share-buyback budget from $2.15 billion to $3 billion. At the time of writing, the stock provides a yield of 2.9%.
A $10,000 investment in Suncor two decades ago would be worth more than $110,000 today with the dividends reinvested.
Should you buy?
Production is rising just as oil prices have staged a strong recovery, and the general outlook for the market remains positive. Sanctions against Iran and falling production in Venezuela could push global oil prices even higher in 2019.
Investors should see another generous dividend increase next year and the long-term growth potential is significant, given the vast resource base and the strong balance sheet. If you are an oil bull, Suncor deserves to be on your TFSA retirement fund radar.
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Fool contributor Andrew Walker has no position in any stock mentioned.