Suncor (TSX:SU) and BCE (TSX:BCE) are down considerably from their 12-month highs. Contrarian investors seeking dividends and a shot at big total returns are wondering if SU stock or BCE stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Suncor
Suncor used to be a popular pick among energy investors who liked the integrated business structure and the reliable dividend. Historically, the combination of production, refining, and retail businesses offered steady revenue streams and profits through the cycles in the oil market. When oil prices dropped, the refineries and gas stations often did well.
The pandemic, however, hammered all three groups due to the plunge in fuel demand caused by lockdowns. Suncor cut the dividend by 55% in the early weeks of the pandemic. This upset long-term investors who expected the payout to remain untouched, as it had during previous downturns.
Suncor eventually bumped the dividend back up to its previous level and has subsequently raised the payout to a new high, supported by the rebound in oil prices through 2021 and 2022. The stock is still out of favour.
Suncor trades near $40 per share at the time of writing. That’s close to where it was before the 2020 crash. Oil sands peers are trading significantly above their early 2020 levels, so Suncor is trailing the pack.
This might be a contrarian opportunity for oil bulls. Suncor took advantage of the rebound in oil prices in 2021 and 2022 to reduce debt and buy back stock. The company sold off its renewable energy group and has acquired 100% of the Fort Hills operation it previously shared with multiple partners.
Suncor’s new chief executive officer trimmed staff levels this year and is focused on making the company more efficient. It will take time to turn things around, but Suncor could deliver big gains for patient investors. At the time of writing, the stock provides a 5.2% dividend yield, so you get paid well to wait for the recovery.
BCE
BCE just reported second-quarter 2023 results. Adjusted earnings fell compared to the same period last year, as BCE took charges on staff reductions and was hit by rising borrowing costs. BCE cut 1,300 positions in its media group and shut down six radio stations in an effort to restructure the division as it contends with falling ad revenues in the radio and television segments. Digital revenues, however, jumped 20% in the quarter compared to the previous year and now account for about a third of revenue in the media business.
BCE’s anchor mobile and internet subscription operations remain strong. As a result, management reconfirmed full-year guidance. Total revenue is expected to increase by 1-5% compared to 2022, and free cash flow growth is targeted at 2-10%.
This should support another solid dividend hike for 2024. BCE raised the payout by at least 5% in each of the past 15 years. Investors who buy BCE stock near the current price of $56 can get a 6.9% dividend yield.
Is one a better pick?
Investors seeking passive income should probably make BCE the first choice due to the higher yield. For total returns, I would probably split a new investment between the two stocks. Suncor and BCE both appear oversold right now and could deliver big gains on the next recovery.
Ongoing volatility should be expected, but these stocks deserve to be on your radar for a contrarian TFSA or RRSP portfolio.
