The stock market has generated significant wealth for long-term investors. While equities are extremely volatile in the near term, they are the most distinguished asset class in terms of beating inflation. But it’s crucial to identify companies that enjoy a wide economic moat, predictable cash flows, and widening profit margins to generate market-beating gains.
Even though the TSX index has gained 123% after adjusting for dividends in the last 15 years, several stocks in the Canadian equity market have trailed these returns by a wide margin. One such TSX energy stock is Suncor (TSX:SU), which has disappointed investors since July 2008.
Suncor stock has fallen by 24% in the last decade and a half. Even if we include dividends, the TSX stock is still down 0.05%. So, an investment of $2,500 in Suncor stock in 2008 would be worth about the same after accounting for dividends.
Despite this underperformance, let’s see if it makes sense to buy Suncor Energy stock right now.
Is Suncor stock a good buy today?
Suncor is an integrated energy infrastructure company that produces oil from the Canadian oil sands. Trading at an enterprise value of $50 billion, Suncor has assets and investments in the Canadian East Coast, the U.K., and other international regions.
It has four refineries in Canada and the U.S., which process oil sands crude into refined products. The TSX giant has also been investing in renewables since 2006 to diversify its base of cash-generating assets.
Suncor aims to grow free funds flow between 3% and 5% each year and expects to end 2025 with cash flows of $2 billion. A steady stream of income can help Suncor reduce balance sheet debt, increase capital expenditures, and increase shareholder wealth. For example, it now expects to increase dividends and buybacks between 6% and 8% over time.
Suncor pays shareholders a forward dividend yield of 5.4%. These payouts have increased by 16% annually in the last 19 years, which is exceptional for a cyclical stock. The company aims to have a payout ratio of less than 60%, which increases its flexibility further.
Priced at seven times forward earnings, Suncor stock also trades at a cheap valuation.
Suncor stock is a high-risk bet
Despite its tasty dividend yield and cheap valuation, investors should understand that investing in Suncor is quite risky, especially if oil prices decline further. Suncor reported record profits in 2022, allowing it to increase quarterly dividends from $0.21 per share in September 2021 to $0.52 per share in March 2023.
But similar to several other energy stocks, Suncor lowered dividends by 55% during the onset of COVID-19 when prices fell off a cliff. Additionally, a lower pricing environment in 2023 will narrow its adjusted earnings to $5.65 per share from $8.34 per share in 2022.
Suncor carries over $16.5 billion in debt and has $1.13 billion in cash. So, the rising interest rate is bound to lower profit margins further for the company.
Despite these near-term headwinds, analysts remain bullish on Suncor stock and expect shares to surge over 40% in the next 12 months.
