When it comes to many of the top dividend stocks Canada has to offer, many of the highest-quality options (that I typically cover) come with valuation multiples that reflect this quality. In today’s market, companies are typically valued according to the quality of their underlying balance sheets and earnings capabilities. As such, it’s hard to find companies yielding 4.5% with valuations that seem unnaturally low.
That said, I’ve made the argument before (and I’ll make it again) that Suncor (TSX:SU) looks like one such company worth buying in this environment. The energy giant trades at a forward price-to-earnings multiple of just 13 times despite providing investors with a very stable and juicy 4.5% dividend yield.
Let’s dive into why this might be and why this stock may still be a buy despite various headwinds.
Energy stocks continue to take it on the chin
Whether we’re talking about Canadian energy stocks or companies operating globally, this sector has seen its fair share of volatility lately. Energy prices continue to fluctuate as investors attempt to determine whether or not the global economy is headed into a recession. And with energy producers like Suncor largely beholden to commodity prices, that can spell stock price volatility from time to time.
The reality is that the macro environment is one in which constant flux is the only thing that can really be held constant. As such, modelling out where one thinks oil prices will be a year from now, let alone 10 years from now, is an exercise that’s very difficult to carry out.
Unfortunately, the reality is that the earnings energy giants like Suncor will be able to produce will be tied to where energy prices are expected to trend over time. On this front, long-term investors considering Suncor will need to make a determination as to whether the policy environment over a specific timeframe will remain favorable (or not), and how that may impact the company’s fundamentals moving forward.
What do the current fundamentals say?
If we hold all else equal (which, again, is a difficult thing to do, especially in the energy sector), and assume oil prices remain relatively stable moving forward, Suncor is trading at an incredibly steep discount right now.
The company’s valuation currently sits around 10 times trailing earnings and under 13 times forward earnings. In other words, while the market is pricing in some significant earnings deterioration moving forward, this is still a stock that’s trading at less than half the multiple of other large-cap blue-chip names.
With a dividend yield of 4.7% supported by a solid balance sheet with plenty of cash (and not as much debt as many of its peers), this is a stock I think is poised for double-digit returns for the foreseeable future.
Again, anything can happen, and there are certainly risks to be considered with such a holding. But in my view, Suncor remains a stock that could be a long-term winner, and I think the market is overlooking it right now.
