After trouncing the equity markets in 2022, energy stocks have cooled off in recent months, as investors are worried about the threat of a global recession negatively impacting crude oil prices in the near term. In the last few months, lower oil prices have dragged shares of TSX energy stocks lower. But this has also increased the dividend yields of several companies, including Suncor (TSX:SU).
Suncor stock has a dividend yield of 4.9%
One of the largest companies in Canada, Suncor is trading at an enterprise value of $71.6 billion. An elevated pricing environment in 2022 allowed Suncor to deliver record annual adjusted funds from operations (FFO) of $13.05 per share. It achieved the second-highest oil sands and synthetic crude oil production last year, as Suncor enjoyed strong refinery utilization rates.
Due to strong production numbers, Suncor raised its dividend twice in 2022, increasing the payout by 24% year over year. It now pays shareholders an annual dividend of $2.08 per share, indicating a forward yield of 4.9%.
Higher oil prices and record profits allowed Suncor to reduce its net debt by $3.2 billion. In 2022, it allocated 60% of excess funds toward share buybacks and the rest toward debt reduction.
Despite its stellar performance in 2022, Suncor is a high-risk bet for investors, especially if oil prices move lower rapidly. For instance, Suncor cut its dividends by more than 50% at the onset of COVID-19, making investors extremely nervous.
In the last 20 years, its dividend payouts have increased by 15% annually, which is quite exceptional. However, Suncor stock has trailed the broader markets in cumulative returns in this period. Since May 2003, Suncor stock has returned 457% to shareholders compared to returns of 459% and 565% for the TSX and S&P 500 indices, respectively.
Suncor is priced at seven times forward earnings, which is very cheap. It’s also trading at a discount of almost 30% to consensus price target estimates. But there is another TSX stock you can buy that is a much better bet compared to Suncor.
Why I’m bullish on CNQ stock
Shares of Canadian Natural Resources (TSX:CNQ) have surged by a staggering 2,130% in the last two decades, making it among the top performers on the TSX. In this period, the Canadian oil giant has increased its dividends by more than 20% annually and even maintained the payout amid COVID-19.
In the last two years, CNQ has leveraged its widening cash flows to improve its balance sheet and reduced net debt by more than $10 billion in 2022.
Canadian Natural Resources is a well-diversified company that produces crude oil and natural gas. The TSX blue-chip company is armed with an investment-grade balance sheet, providing it with enough flexibility to target highly accretive acquisitions as well as organic growth opportunities. It is Canada’s largest crude oil producer and continues to benefit from economies of scale.
Priced at 10.6 times forward earnings, CNQ stock offers investors a forward yield of 4.4%. It’s also trading at a discount of 12% to consensus price target estimates.