Valued at $62.5 billion by market cap, Suncor Energy (TSX:SU) is among the largest companies in Canada. The TSX energy stock has returned just 150% to shareholders in the last two decades. Even if we adjust for dividend reinvestments, cumulative returns are closer to 320%. It’s evident that Suncor Energy has failed to deliver market-beating gains to long-term shareholders primarily due to the volatility associated with oil prices.
Suncor Energy pays shareholders an annual dividend of $2.18 per share, translating to a forward yield of 4.4%. While these payouts have risen at a compound annual growth rate of 15.6% since 2004, Suncor was forced to suspend its dividends at the onset of the COVID-19 pandemic when oil prices fell off a cliff, making it a high-risk investment if the economy enters a downturn.
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Is Suncor stock undervalued?
Suncor Energy is an integrated energy company that focuses on developing petroleum resource basins in Canada’s Athabasca oil sands. Its strong operational performance, disciplined cost and capital management, and a supportive macro environment allowed Suncor to generate $3.4 billion, or $2.65 per share, in adjusted funds from operations in the second quarter (Q2) of 2024. In the last six months, its adjusted funds from operations totalled $5.11 per share, while its operating expenses fell by $250 million to $3.2 billion.
In Q2, Suncor generated $1.4 billion of free funds flow or $1.05 per share, indicating a payout ratio of less than 52%. Suncor Energy’s payout ratio is sustainable and allows the company to reinvest in acquisitions, lower balance sheet debt, and further enhance shareholder value.
In the June quarter, it returned $1.5 billion or $1.19 per share, including a dividend payment of $698 million and $825 million in buybacks. Its capital return program has totalled $2.5 billion in the last six months. Suncor also ended Q2 with a net debt of $9.1 billion, down $500 million year over year.
Priced at 10 times forward earnings, Suncor Energy is quite cheap and trades at a 20% discount to consensus price target estimates. However, Restaurant Brands International (TSX:QSR) is another TSX dividend stock much better than Suncor.
The bull case for QSR stock
Valued at a market cap of $44 billion, Restaurant Brands International has returned over 200% in dividend-adjusted gains since its IPO (initial public offering) in December 2014, easily outpacing the broader index. Despite its outsized returns, QSR stock offers shareholders a forward yield of 3.3%. In the last nine years, its dividends have risen by more than 19% annually.
Restaurant Brands owns a portfolio of fast-food brands, including Tim Hortons, Burger King, Popeyes Firehouse Subs, and Carrols. In late 2021, it acquired Firehouse Subs, a sandwich chain that generates more than US$1 billion in system-wide sales annually.
In Q2 of 2024, Restaurant Brands grew comparable sales by 1.9% year over year while global system-wide sales were up by 5%. Its adjusted operating income was up 9.3%, while adjusted earnings rose over 3% year over year.
In the last 12 months, Restaurant Brands has increased its sales by 10.3% year over year to $7.47 billion. Comparatively, its free cash flow totalled $1.17 billion, indicating a healthy margin of over 15%.
Priced at 15.5 times forward earnings, QSR stock is quite cheap, given its potential to expand into several other emerging markets, such as India and China. Analysts remain bullish and expect the stock to surge roughly 60% in the next 12 months.
