Suncor stock is finally catching a bit of a tailwind. Investors shunned Canada’s largest integrated energy company over the past two years after management cut the dividend by 55% in the spring of 2022 to preserve cash. The move wasn’t replicated by Suncor’s Canadian peers, and that put the stock in the doghouse, even through most of 2021, when oil prices rebounded and Suncor generated strong results.
Management took advantage of the undervalued share price to buy back a large chunk of the outstanding shares last year and used excess cash to aggressively pay down debt. The board then raised the dividend by 100% when Suncor announced the Q3 2021 results.
WTI oil is up to US$88 per barrel at the time of writing. This is a very profitable price for Suncor’s oil sands production operations. At the same time, the Q3 results showed a strong recovery in Suncor’s downstream businesses that include refineries and roughly 1,500 Petro-Canada retail locations. Fuel demand should extend its rebound in the back half of 2022, and oil prices are expected to remain high for the next two or three years until global producers can ramp up new output to keep up with the surge in demand.
Suncor currently trades near $37.50 per share and offers a 4.5% dividend yield. Another large dividend increase could be on the way when the Q4 2021 results come out or in the spring when Suncor reports its Q1 2021 numbers. Substantial share buybacks will also likely continue this year.
As a result, it wouldn’t be a surprise to see Suncor stock hit the pre-pandemic price of $44 per share in the coming months.
Enbridge isn’t an oil and gas producer. The company simply moves the products along its vast pipeline networks and charges a fee for providing the service. Enbridge also owns natural gas distribution utilities and has a growing renewable energy group.
Management streamlined the business and sold about $8 billion in non-core assets before the pandemic. This meant Enbridge was in decent shape to ride out the downturn, as demand for oil dried up in 2020. Despite the rough ride, the board still raised the dividend by 3% at the end of 2020 and increased the payout by another 3% when it provided the 2022 outlook in December last year.
Looking ahead, demand for Enbridge’s services should be robust for the coming years. Fuel demand is expected to rebound significantly as airlines ramp up capacity, and commuters will eventually head back to offices. The company expects its capital program to drive distributable cash flow growth of 5-7% over the medium term. That should support dividend increases in the same range.
The stock just hit a 12-month high above $54 per share, but Enbridge still offers a generous 6.3% dividend yield. Enbridge’s share price could drift up to $60 by the end of the year if management increases earnings guidance or announces another accretive acquisition.
Is Suncor or Enbridge a better buy?
Suncor and Enbridge both pay attractive dividends that should continue to grow in the next few years. Investors who can handle a bit more volatility might want to make Suncor the first choice today, as the stock still looks undervalued and should deliver better dividend growth in the near term.
Investors who are focused on steady passive income and prefer a more stable pick might want to go with Enbridge for the higher yield. I would probably split a new investment between the two stocks today.