Suncor Energy (TSX: SU) is among Canada’s most popular dividend stocks. Valued at a market cap of almost $70 billion, Suncor Energy has returned close to 5,000% to shareholders in the past 30 years after adjusting for dividend reinvestments. It means a $1,000 investment in Suncor stock in August 1994 would be worth close to $50,000 today, easily outpacing the broader market returns. Despite these outsized gains, Suncor Energy offers shareholders a dividend yield of 4%, given an annual dividend of $2.18 per share.
As historical gains don’t matter much to current or future investors, let’s see if Suncor Energy can continue to outpace the TSX index in the next 10 years.
An overview of Suncor Energy
Suncor Energy is an integrated energy company that develops petroleum resource basins. It has three primary business segments, including:
- Oil Sands: The business operates assets in the Athabasca oil sands in Alberta.
- Exploration and Production: It consists of offshore operations off the east coast of Canada and the U.K.
- Refining and Marketing: The business includes infrastructure that supports the marketing, supply, and risk management of refined products, crude oil, natural gas, and byproducts.
A strong performance in Q2 2024
Suncor reported adjusted operating earnings of $1.6 billion, or $1.27 per share, in Q2 of 2024, compared to $1.3 billion, or $0.96 per share in the year-ago quarter. This increase was due to higher crude oil prices, increased sales volumes from oil sands, and higher refinery production. However, higher royalties, lower exploration and production volumes, and lower refined product realizations offset this earnings growth.
Suncor’s adjusted funds from operations in Q2 stood at $3.4 billion, or $2.65 per share, compared to $2.7 billion, or $2.03 per share last year. Its operating cash flow stood at $3.8 billion, or $2.98 per share, compared to $2.8 billion, or $2.14 per share, in the same period last year.
Suncor’s widening operating cash flows allow the company to strengthen its balance sheet and reinvest in capital expenditures. In the last 12 months, its capital expenditures totalled $6.4 billion, while its free cash flow stood at $8.1 billion, or $6.68 per share. Given that Suncor pays shareholders an annual dividend of $2.18 per share, its payout ratio is less than 50%, which increases its financial flexibility significantly.
Suncor Energy ended Q2 with net debt of $9.1 billion, almost $500 million lower than Q1 2024.
Is Suncor’s dividend safe?
In the last 20 years, Suncor Energy has raised its dividends by 16% annually, enhancing the yield-at-cost in this period. While Suncor’s dividend growth is impressive, the company was forced to cut its payouts by 55% when crude oil prices fell off a cliff at the onset of the COVID-19 pandemic.
In its Q2 presentation, Suncor aims to grow its dividends between 3% and 5% annually going forward while focusing on reducing its long-term debt.
Priced at 10 times forward earnings, Suncor Energy is relatively cheap and trades at a discount of 11% compared to consensus price target estimates. If we adjust for dividends, total returns could be closer to 15%.
