A Dividend Giant I’d Buy Over Suncor Stock

Suncor Energy is a blue-chip TSX dividend stock that offers you a tasty yield. But this TSX dividend giant is a better buy.

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Suncor Energy (TSX:SU) is among the most popular dividend stocks in Canada. With a market cap of $65 billion, Suncor is an integrated energy company that pays shareholders an annual dividend of $2.18 per share, indicating a dividend yield of 4.3%. Its operations include oil sands development, offshore oil production, and petroleum refining. Moreover, Suncor is developing petroleum resources and advancing the transition to a low-emissions future through investments in power and clean energy.

Is Suncor Energy stock a good buy?

Despite a challenging macro environment, Suncor reported record upstream production of 835,000 barrels per day and refined product sales of 581,000 barrels per day. Its upstream included all-time high oil sand production of 785,000 barrels per day, allowing the company to generate $3.2 billion in adjusted funds from operations (FFO) and $1.8 billion in operating income.

Its stellar performance in Q1 enabled Suncor to return $1 billion to shareholders, including $700 million in dividends and $300 million in buybacks. Suncor Energy reported free funds flow of $1.9 billion in Q1, indicating a dividend payout ratio of less than 40%, which is sustainable even if oil prices move lower.

Investors might be concerned over the company’s net debt of $13.5 billion, which is sizeable given interest rate hikes in the last two years. However, Suncor has used its cash flow to reduce the net debt by $2.2 billion in the last 12 months.

While Suncor has an attractive dividend yield, it was forced to lower its payout by 55% when oil prices collapsed amid the COVID-19 pandemic. But as oil prices staged a recovery, Suncor has more than doubled its dividend payout in the last four years. In the last 20 years, Suncor has increased dividends by 15.5% annually, which is exceptional for an energy stock.

A dividend giant better than Suncor Energy

While Suncor slashed its dividend in 2020, another TSX energy stock could maintain and even raise its payout amid the dreaded pandemic. In fact, Canadian Natural Resources (TSX:CNQ) has hiked dividends by more than 20% annually in the last 23 years.

Due to consistent dividend hikes, CNQ has returned 1,540% to shareholders since June 2004, much higher than Suncor stock, which has returned less than 400% in this period.

Valued at $101 billion by market cap, Canadian Natural Resources offers light and medium crude oil, primary heavy crude oil, bitumen, and synthetic crude oil. Its midstream assets include two pipeline systems and a 50% working interest in an 84-megawatt co-generation plant at Primrose. CNQ operates in Western Canada, the North Sea, and offshore Africa.

Due to its strong balance sheet, CNQ now has the flexibility to distribute 100% of its fund flows to shareholders. It currently pays shareholders an annual dividend of $2 per share, indicating a forward yield of 4.2%.

In Q1 2024, it reported an adjusted funds flow of $3.1 billion and paid dividends worth $1.1 billion, while stock buybacks amounted to $700 million. Priced at 12.9 times forward earnings, CNQ stock is quite cheap and trades at a 20% discount to consensus price target estimates.

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 recommends Canadian Natural Resources. The Motley Fool has a disclosure policy.

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