The energy sector is crucial to the global economy. For instance, companies in this cyclical sector produce and supply the fuel and electricity needed to keep the economic engine running. However, as this sector is relatively mature and debt-intensive, energy stocks have underperformed the broader markets over the last two decades.
In this article, we examine two TSX energy giants, Suncor Energy (TSX:SU) and Cenovus Energy (TSX:CVE), to determine which is the better stock to own right now.
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Is Cenovus Energy stock a good buy right now?
Cenovus Energy went public in November 2009 and has fallen nearly 18% in the last 15 years. Even if we adjust for dividend reinvestments, cumulative returns stand at 16.6%, compared to the TSX index returns of 244%.
Valued at $43 billion by market cap, Cenovus Energy develops, produces, and markets crude oil, natural gas liquids, and natural gas. Its Oil Sands segment develops and produces bitumen and heavy oil. The company also owns interests in various natural gas processing facilities, while the offshore business is involved in exploration and development activities.
Cenovus generated an operating profit of $2.9 billion in the second quarter (Q2), with an adjusted funds flow of $2.4 billion and a free funds flow of $1.2 billion. In the June quarter, the Canadian oil and gas entity paid more than $1 billion to shareholders via dividends and buybacks.
With a net debt of less than $4 billion, Cenovus will now distribute 100% of its free funds flow to shareholders. Moreover, it has allocated between $4.5 billion and $5 billion towards capital expenditures which should drive future cash flows and dividends higher.
Cenovus Energy pays shareholders an annual dividend of $0.72 per share, indicating a forward yield of 3.1%. Priced at 9.3 times forward earnings, Cenovus Energy stock trades at a discount of over 40% to consensus price target estimates.
Is Suncor stock undervalued?
Valued at $66 billion by market cap, Suncor Energy stock has returned 320% to shareholders in dividend-adjusted gains since October 2004. In this period, the TSX index has returned more than 400%.
Suncor is an integrated energy company that focuses on developing petroleum resource basins in Canada’s Athabasca oil sands. In Q2 of 2024, it reported adjusted funds from operations of $3.4 billion, or $2.65 per share. In the first six months, Suncor’s funds from operations stood at $6.6 billion or $5.11 per share. Suncor’s focus on optimizing costs lowered operating expenses by $250 million in the last three months.
This meant Suncor reported a free funds flow of $1.4 billion or $1.05 per share, indicating a payout ratio of less than 50%, given its dividend payment of $698 million.
Suncor Energy pays shareholders an annual dividend of $2.18 per share, which translates to a forward yield of 4.2%. Priced at 13.5 times forward earnings, Suncor Energy stock trades at a 15% discount to consensus price target estimates.
The Foolish takeaway
The cyclical nature of the energy sector makes both Cenovus Energy and Suncor Energy high-risk investments. For instance, while the two companies offer attractive dividend yields, they were forced to lower and even suspend the payouts during COVID-19. If you want to gain exposure to the two energy heavyweights, it makes sense to invest in a low-cost TSX index exchange-traded fund and further diversify your portfolio.
