Suncor (TSX:SU) and BCE (TSX:BCE) raised their dividends in the past year, and investors are wondering if weakness in the share prices over the past few months makes these TSX stocks attractive right now for a portfolio focused on passive income and total returns.
Suncor
Suncor (TSX:SU) just announced a new chief executive officer that will take control of the business and look to put it on track again after a series of safety issues and a lagging share price led to the resignation of the previous boss last year. Suncor trades near $44.50 per share at the time of writing compared to $53 last summer.
Despite the strong rebound in oil prices in the past two years and the windfall of cash flow for energy companies, Suncor’s share price has only recovered to its pre-pandemic level, while some oil sands peers are up nearly 100%.
Investors are still taking a cautious approach with the stock, even with most of the uncertainty that emerged last year now addressed. Activist investors have backed off and Suncor’s strategic review of its portfolio is complete. The company is unloading non-core assets, but will maintain its integrated structure, which includes production, refining, and retail assets.
Energy bulls say West Texas Intermediate oil is headed back to US$100 per barrel in the next 12-18 months. If that turns out to be the case, Suncor stock looks undervalued.
The board reversed the dividend cut that occurred in 2020, and subsequent hikes have pushed the distribution to a new high. At the time of writing, Suncor provides a 4.7% dividend yield.
BCE
BCE trades near $61.50 at the time of writing. The stock was above $73 in April last year. Investors might be worried that soaring interest rates and high inflation will put a dent in revenue as consumers hold on to older phones for longer and businesses cut back on advertising. BCE has a large media business that includes a TV network, specialty channels, radio stations, and digital assets that rely on ad spending to drive revenue.
Higher interest rates will also drive up debt expenses. Telecoms use debt to fund large capital programs. As interest rates and bond yields increase it becomes more costly to borrow money. This can reduce cash flow available for dividend increases if revenue growth doesn’t offset the difference.
On the positive side, BCE’s large pension fund is able to generate much better returns in the current rate environment. This means the company doesn’t have to add as much to the fund.
BCE generated solid results last year. Adjusted net earnings rose 5.6% compared to 2021. Free cash flow increased 2.9%. Management says revenue is expected to increase 1-5% in 2023 and free cash flow growth is targeted at 2-10% this year, while adjusted earnings per share will likely slide by 3-7% due to higher expenses.
BCE gets most of its revenue from internet and mobile subscription services. These revenue streams should hold up well if the economy enters a recession.
At the time of writing, the stock provides a 6.3% dividend yield.
Is one a better pick today?
Suncor and BCE pay attractive dividends that should continue to grow. The stocks appear oversold right now and should deliver decent total returns in the coming years.
Oil bulls with a contrarian investing style might decide to buy Suncor while it is still heavily out of favour. Given the uncertain economic outlook, however, I would probably make BCE the first choice today for a portfolio focused on passive income.
