RRSP investors are searching for deals in the market today that could be big winners in 2022 and beyond.
Suncor (TSX:SU)(NYSE:SU) slashed its dividend by 55% in the early months of the pandemic to preserve cash. The move upset investors, and Suncor’s share price has underperformed its peers in the past 18 months. Things might change, however, in 2022.
The company is best known as an oil sands producer, but Suncor also has refineries and about 1,500 Petro Canada retail locations.
The integrated business structure had always provided Suncor with a good hedge against volatility in the oil market. In the past, a drop in oil prices was normally due to extra supply, but fuel demand remained strong. Lower input costs for the refineries often increased margins, and cheap gas prices supported demand at the retail locations.
The pandemic has been unique in that the crash in the price of oil was due to a global plunge in fuel usage. Airlines cut capacity by 90% and commuters stayed home.
A rebound in the price of oil in 2021 and the lifting of travel restrictions means fuel demand is now soaring. In Q3 2021, gasoline demand was within 7% of the 2019 level. As a result, Suncor is enjoying a gusher of profits, and that trend looks set to continue next year.
Suncor reported strong Q3 2021 results. The board just raised the dividend by 100%, bringing the payout back to the 2019 amount. In addition, Suncor has reduced debt so significantly that it expects to hit its 2025 debt-reduction target by the end of 2021. This means more cash flow should be available for dividend increases in the next few years.
Suncor is also aggressively buying back shares. This benefits remaining investors as they effectively own a larger piece of the pie. Under the current share-repurchase program Suncor will buy up to 7% of the outstanding common stock through the end of January.
Suncor trades near $32.50 at the time of writing. The stock traded at $44 before the pandemic when oil prices were much lower than they are today. With the downstream operations performing well, the stock appears undervalued at the current price.
It wouldn’t be a surprise to see Suncor hit $40 in 2022. Investors who buy the stock now can pick up a 5.1% dividend yield.
In addition, Kinross expects production to jump to 2.7 million ounces in 2022 and 2.9 million ounces in 2023 due to the anticipated completion and ramp up of new projects.
Kinross declared a quarterly dividend of US$0.03 per share in the quarter. The distribution could grow quickly in the next few years as production increases. The current payout offers a 1.8% yield.
Gold hit US$2,080 per ounce in 2020, but struggled through much of the first nine months of 2021. A recent rally, however, is bringing new interest to the market. Gold trades near US$1,865 per ounce at the time of writing compared to US$1,723 near the end of September. Gold stocks are finally starting to move higher after a major drop this year, but they still look undervalued.
Kinross trade near $8.40 per share compared to the 2020 high of $13. That’s a 35% drop while gold is only down about 10%.
The gold rally could extend well into 2022 on demand driven by investors looking to hedge against high inflation. Based on the recent strength, a run back above US$2,000 is certainly possible in the next 12 months.
The bottom line on cheap stocks to buy now
Suncor and Kinross Gold are attracting new investor attention and could rally significantly in 2022 on strong oil and gold prices. The shares appear undervalued right now and deserve to be on your RRSP radar.