For investors looking at the energy sector, Suncor Energy (TSX:SU) remains among the top Canadian stocks to consider. This company’s strength as a key oil producer, primarily focused on the Canadian oil sands, has provided volatility in the past. Oil prices are a fickle thing, after all. However, the company’s recent surge toward 52-week highs is certainly encouraging for those who have taken a long-term view of the stock.
That said, Suncor’s stock price (zooming out) is still well below where it traded during the previous energy boom prior to the Great Recession. Accordingly, there are plenty of bears in this space who may tell you now’s not the time to invest in this stock.
Let’s look at the bull case behind Suncor, and why the bears may be wrong.
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Strong financials supported by robust business model
If the current geopolitical climate has taught us anything, it’s that energy independence is ultra-important in this day and age. Companies like Suncor that secure North American energy independence have received somewhat of a premium (or at least less of a discount) than they historically have. This multiple expansion has been part of the story with Suncor, but it’s really only a small piece of the puzzle.
The fact that Suncor trades at less than 9 times earnings means this is a value stock by most fundamental viewpoints. The company’s core oil and gas (and refining) businesses have produced very steady cash flows, which have grown incredibly in recent years as energy prices have remained high. Of course, there’s a risk of commodity price declines in a recessionary environment. But for now at least, the company is pumping out an incredible amount of cash flow, allowing Suncor to pay a current yield of 4.3% to investors.
I think there’s plenty of room for growth in the future, considering the company’s upstream production of 835,000 barrels of oil per day and room for expansion on this front. Yes, there will certainly be competition from renewables over time. But for the next few decades, we’re going to need the energy Suncor provides us with.
Is this a long-term holding?
Suncor stock has performed very well during this boom in commodity markets. But again, the question is whether it will still be a stock to hold if we do see some cracks in the economy form in the coming years.
I think energy is one of those boom-bust sectors that tends to go into and out of favour for long periods of time. Accordingly, there is some risk in this regard.
But for investors with a truly long-term investing time horizon, I think owning Suncor at less than 9 times earnings today and collecting a yield while being patient makes sense. This is a top dividend value stock I think is worth considering at current levels, despite the prescient concerns around its core business.
