Suncor (TSX:SU) and BCE (TSX:BCE) are down in recent weeks amid pullbacks in the energy and telecoms sectors. Contrarian investors seeking TSX dividend stocks for passive income are wondering if SU stock or BCE stock is now undervalued and good to buy for a self-directed portfolio.
Suncor
Suncor has underperformed its oil sands peers in the post-pandemic rebound. In fact, at $39 per share the stock trades close to where it was right before the 2020 plunge. Other major Canadian producers have seen their share prices rise as much as 100% from their early 2020 levels.
Suncor slashed its dividend by 55% in the spring of 2020 as a measure to protect cash flow until it became clear that the oil market was going to recover. Management used the cash windfall from the rebound in prices to reduce debt and buy back stock through most of 2021 and eventually reversed the dividend cut. In fact, the board raised the dividend to a new all-time high.
Investors, it seems, still aren’t pleased. Ongoing safety and operational challenges might be keeping people on the sidelines. Board and management turmoil hasn’t helped, but Suncor now has a new chief executive officer in place who is committed to improving shareholder returns.
The negative sentiment on the stock might be overdone. Suncor made good progress in the past two years to shore up the balance sheet and has monetized non-core assets. The price of West Texas Intermediate (WTI) oil is currently near US$73 per barrel. Oil bulls expect WTI to move back to US$100 in the next 12-18 months, as rising demand bumps up against tight global supplies.
Oil bears, however, say a global economic downturn will take the steam out of the post-pandemic demand recovery and could keep oil prices near current levels or even lead to more downside.
Time will tell which camp is correct. At the time of writing, Suncor stock provides a 5.3% dividend yield, so you at least get paid well to wait for a rebound.
BCE
BCE isn’t as cheap as it was last fall, when the stock slipped to $56. At the current price near $63, however, BCE still looks cheap compared to the 2022 high around $74.
BCE should be a good defensive stock to own if you are a concerned that a recession is on the way. The company gets most of its revenue from mobile and internet subscription services. These tend to be essential for residential and commercial customers, so there isn’t much risk of the network revenue streams getting cut in a material way.
BCE is still vulnerable to a slowing economy in other parts of its business. The media group is already seeing ad revenue slide, as companies reduce marketing budgets to help cover rising labour, debt, and material costs. The sale of new phones could also slow down in a recession.
BCE is actually predicting a drop in adjusted earnings in 2023, although this is more connected to rising expenses. Revenue and free cash flow are still expected to increase for the year compared to 2022. This means investors should see another decent dividend hike in 2024. BCE raised the payout by at least 5% in each of the past 15 years.
Investors who buy BCE stock at the current level can get a 6.1% dividend yield.
Is SU or BCE stock good to buy today?
Ongoing market volatility should be expected and drops to new 12-month lows in both stocks are certainly possible.
That being said, contrarian investors who think oil is headed higher might want to make Suncor the first choice right now. The dividend should be safe and there is probably decent upside potential if the price of WTI oil heads moves significantly higher in the next two years.
Otherwise, BCE offers a great yield and should be a solid holding to ride out any economic turbulence that might be on the way.
