There’s undervalued, severely undervalued, and beyond undervalued. Suncor Energy (TSX:SU)(NYSE:SU) found itself in the latter category after last week’s vicious sell-off that brought down the best and brightest stocks, including the bluest of blue chips. The occurrence of a black swan event, something that nobody saw coming, caused a global oil supply shock, sending WTI prices plunging over 20% in just a few weeks.
As one of the most resilient integrated energy companies in the oil patch, one would think that Suncor stock would be relatively insulated from such a drastic spill in oil prices, but it wasn’t, as shares tumbled as low as 8.6% in a week that was the worst on record since the disaster that was the Financial Crisis. And just like that, Suncor finds itself back at multi-year lows at $36 and change, with a dividend yield that’s swollen past the 5% mark thanks in part to considerable share price depreciation and a generous 11% dividend hike in the last quarter.
A yield north of 5% is unremarkable, especially in the world of Canadian energy. However, investors must realize that Suncor is one of few fossil fuel firms that can not only sustain its above-average dividend in this lower oil price environment but continue growing it at a double-digit annualized rate.
The company missed on earnings in an underwhelming fourth quarter but still managed to generate $2.6 billion in funds from operations. Suncor’s board also upped its share-repurchase program by $500 million to $2.5 billion — a genius move given how ridiculously undervalued shares have become.
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What was Uncle Warren thinking?
When you view Suncor stock, not as a cheap way to play the price of oil, but as a way to get a 5% yield alongside +10% in annual growth, it becomes more apparent as to why Warren Buffett is such a big fan given how scarce high yield has become in an era of rock-bottom interest rates.
It also helps that Suncor is close to the cheapest it’s been in recent memory, with shares currently trading at 4.9 times EV/EBITDA, 1.5 times sales, 1.3 times book, and 5.5 times cash flow, all of which are considerably lower than the stock’s five-year historical average multiples of 9.1, 2.1, 1.5, and 8.4, respectively.
Yes, energy stocks are viewed as toxic by some folks in the mainstream financial media, but that doesn’t mean the entire sector is to be avoided, especially given a majority of the damage to oil stocks has already been done.
Nobody knows whether WTI will be at US$40 or US$100 in three years from now, or if WCS can close the gap with WTI. What Buffett and other Suncor shareholders know, though, is that their Suncor investment will continue to pay them a handsome and growing dividend through thick and thin.
Foolish takeaway
Of course, capital losses could still cause total returns from Suncor to be flat to negative.
However, when you consider shares are both fundamentally and technically (the stock is sitting at a long-term level of support at around $36) sound, Suncor begins to look like one of the more timely opportunities on the TSX today.
Stay hungry. Stay Foolish.
