Suncor Stock: How High Could it Keep Going?

Down 26% from 52-week highs, Suncor stock offers you a dividend yield of 5.3%. But is this TSX energy stock a buy right now?

| More on:
Group of industrial workers in a refinery - oil processing equipment and machinery

Image source: Getty Images

After a stellar run in the last two years, energy stocks such as Suncor (TSX:SU) have pulled back significantly in recent months. For instance, Suncor stock more than doubled between 2021 and 2022 and is currently trading 26% below its 52-week high.

In 2022, it delivered record annual returns to shareholders and executed on its capital-allocation strategy. It repurchased 117 million outstanding common shares, increased dividends by 24% and reduced net debt by $3.2 billion last year.

As oil prices touched multi-year highs, Suncor reported adjusted funds from operations of $18 billion in 2022, up from $10.2 billion in 2021 and just $3.8 billion in 2020. It allocated 60% of excess funds towards buybacks and the rest towards lowering debt.

However, let’s see if Suncor can continue to enhance shareholder wealth amid volatile oil prices and the threat of an upcoming recession.

Is Suncor stock a buy or a sell?

In the first quarter (Q1) of 2023, Suncor’s adjusted funds from operations stood at $3 billion, down from $4.1 billion in the year-ago period. It returned $1.6 billion to shareholders via repurchases and dividends.

In the March quarter, Suncor completed the sale of its wind and solar assets for gross proceeds of $730 million and acquired an additional 14.65% working interest in Fort Hills for $712 million. The company confirmed it reached an agreement to sell its E&P (exploration and production) portfolio for $1.2 billion.

Moreover, Suncor entered an agreement to acquire the Canadian assets of TotalEnergies, where the latter also owns a 31.23% working interest in Fort Hills. The acquisition is valued at $5.5 billion and is expected to close by the end of Q3 this year.

While the acquisitions will be funded by debt, Suncor is focused on maintaining its current capital-allocation levels, which suggests it will allocate excess funds equally towards lowering debt and share buybacks.

These acquisitions should allow Suncor to benefit from higher cash flows over time, resulting in higher dividend payouts. Suncor currently pays investors an annual dividend of $2.08 per share, indicating a forward yield of 5.4%. These payouts have increased at an annual rate of 16% in the last 19 years.

What’s next for Suncor stock and investors?

As oil prices have pulled back and the cost of debt has risen, analysts expect Suncor’s adjusted earnings to narrow from $8.34 per share in 2022 to $5.63 per share in 2023. So, Suncor stock is priced at 6.8 times forward earnings, which is very cheap.

But energy stocks are trading at a discount due to the cyclical nature of this sector. In case recession fears are materialized, oil prices and earnings of energy companies, including Suncor, will reduce further, making them a risky investment right now.

Additionally, Suncor reduced its dividends by 55% during the COVID-19 crash three years ago, and a similar cut may occur if the economy remains under pressure.

Alternatively, Suncor is a well-diversified energy giant that has survived multiple economic cycles in the past and returned 382% to shareholders since the end of May 2003, after adjusting for dividends. In this period, the TSX Index has returned around 420%.

Analysts remain bullish on Suncor stock and expect shares to gain over 34% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Oil Prices Are Rising: Here Are the Enegy Stocks That Will Benefit the Most

Top TSX energy stocks such as Suncor Energy should be on your shopping list as crude oil prices remain elevated…

Read more »

stocks rising
Energy Stocks

Here’s How Suncor Stock Could Really Energize Your Portfolio

Suncor stock is a top Canadian energy stock powered-up enough to outperform industry peers this time around. Here's why...

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, September 28

The U.S. quarterly GDP data and Fed chair’s comments about the economy will remain on TSX investors’ radar today.

Read more »

A person builds a rock tower on a beach.
Energy Stocks

CPP Enhancement: Here’s How Much Your Benefits Could Increase

You may or may not receive higher CPP benefits thanks to CPP enhancement. You can receive passive income from Fortis…

Read more »

Gas pipelines
Energy Stocks

Should You Buy Enbridge at These Levels?

Given its stable financials, high dividend yield, and healthy growth prospects, Enbridge would be an excellent buy at these levels.

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Tuesday, September 26

Weakness in commodity prices could pressure the TSX index at the open today, as investors closely monitor the important U.S.…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Energy Stocks

This 7 Percent Dividend Stock is My Top Pick for Immediate Income

Looking for a solid dividend stock that can provide an immediate income source? Consider this dividend gem now while its…

Read more »

oil tank at night
Energy Stocks

The Best Canadian Energy Stocks to Buy for Dividends

Even growth investors will want to have these high-yielding energy stocks on their watch lists.

Read more »