Suncor Energy Inc. (TSX:SU) is an integrated oil and gas company. This means that it has both upstream and downstream operations such as oil sands production, as well as refining and oil upgrading operations. Since the beginning of 2023, Suncor’s stock price has rallied almost 7%. Yet, it still yields a pretty generous 4.54%.
Should you buy Suncor Energy stock for its dividend today?
Suncor stock (SU): A dividend history
The annual income that dividend stocks provide is certainly a good reason to buy certain stocks. For its part, Suncor has mostly been a reliable dividend-payor. In fact, in the last 10 years, Suncor’s dividend has increased 300% – that’s a compound annual growth rate (CAGR) of 15%.
Suncor’s 20-year dividend history is even more impressive. During this time period, Suncor’s dividend has grown more than 2,000% from an annual dividend of 8.6 cents per share in 2003 to the current dividend of $2.08, for a CAGR of 17%. This is a very strong dividend history, especially when we take into account how volatile oil and gas prices are.
So, with this perspective, we can start to understand the resiliency and power of Suncor’s business model. Today, Suncor Energy (SU) stock is yielding 4.54%. And as you’ll see in the following section, Suncor’s financials and outlook remain strong.
In Suncor’s latest quarterly result (Q2 2023), earnings and cash flow were down versus last year. However, Suncor grew production and improved its refinery utilization to 85%. The end result was operating cash flow of $2.8 billion and adjusted operating earnings of $1.2 billion ($0.96/sh). While these results were both well below last year’s levels, they are higher relative to five years ago. Also, last year’s levels reflected unusually high oil prices, which averaged $95 in 2022.
But the results were also hit by some other factors, such as planned maintenance at Suncor’s Fort McMurray operations, and a special charge related to Suncor’s workforce reduction plans. Looking ahead, Suncor has many opportunities to add to its financial performance. In fact, management aims to improve the financial and operational performance in almost all aspects of the business.
Beyond this, I think we can take comfort in the fact that Suncor’s balance sheet is quite strong. This is reflected in Suncor’s debt-to-capital ratio of 29%. It’s also reflected in Suncor’s net debt balance of $14.4 billion, which is $1.3 billion lower than at the end of Q1.
Valuation does not accurately reflect the strength of the business
Finally, I include Suncor stock’s low valuation in my assessment of the stock price. As you know, Suncor has been plagued by negative investor sentiment as well as operational and safety issues. This has brought Suncor’s stock down to, in my view, an unreasonably cheap valuation.
In fact, SU stock currently trades at a mere 1.5 times book value and 10 times this year’s estimated EPS. This is quite low considering that Suncor has an ROE of over 15% and its earnings are expected to more than double from 2021 levels by 2024.
In my view Suncor’s attractive valuation, along with its strong dividend and financial history, means that the stock deserves our consideration. Add to this its quality integrated asset base and cash flow generating power, and we can easily see that the stock is actually worth buying for far more than its dividend.