This is the third idea in my series featuring the strongest Canadian dividend-paying stocks. Today’s buy idea is a Canadian energy company that earns a Dividend Safety Rating of 9.7 and a Dividend Growth Rating of 7.5 from IRIS, my Individualized Retirement Income System.
Suncor Energy (SU) is a diversified energy company that produces, refines, transports and markets a variety of energy products. In addition to its core oil sands operations in Canada, the company also has exploration and production operations in the U.S., Northern Europe, Libya and Syria (currently suspended due to the war there).
Suncor has paid dividends sine 1994, and has never cut its dividend. Last year, the company boosted its dividend by a whopping 54%, from $0.52 per year to $0.80. Another increase followed this year, to the current rate of $0.92 per year, for a current yield of 2.2%. (All dollar amounts in Canadian dollars.)
Suncor’s dividends are well supported by growing earnings. In the latest quarter, Suncor reported record earnings of $1.8 billion, 31% increase from $1.4 billion a year earlier. Cash flow increased a similar amount, approximately 31%, to $1.96 from $1.50 in the prior year period. Higher prices for oil sands bitumen and natural gas both helped increase Suncor’s margins.
Suncor’s payout ratio of 28% is solid and leaves room for the dividend to grow.
Technically, the stock looks like it may be ready to begin a new uptrend after five years of sideways action. A breakout through the 40 level, where SU broke down in 2011, would indicate that buying power is back. The next resistance level would probably come just under 50, the 2011 high. Short-term, SU is completing a normal pullback after an 11% run-up in April. Suncor (SU), which is traded on both the TSX and NYSE, looks buyable here or on a strong move above 40. Click here for more information on Cabot Dividend Investor.
Last September, I visited Suncor Energy (SU) in Calgary, Canada. The company is an integrated energy company that develops petroleum resource basins in the Athabasca oil sands; this involves the acquisition, exploration, development, production and marketing of crude oil and natural gas in Canada and internationally; transportation and refining of crude oil; and marketing of petroleum and petrochemical products primarily in Canada.
The company has a credible growth plan of disciplined capital investment to fund future projects for the next 20 years, investing through the cycles but not at the expense of productivity and the balance sheet.
Suncor’s focus is on steady 10% production growth per year from 2011 to 2020 for oil sands and 8% for the total company. To maintain productivity, avoid downtime and cost overruns, it prefers not to rush projects; management has a 25- to 30-year view on production, unlike conventional E&Ps where the view is two to three years.
Suncor’s balance sheet is strong with debt to capital including cash at 13%, capital spending is on target, generating high levels of free cash flow after capital spending and dividends.
The stock is trading well below its 52-week high. According to my discounted cash flow models, SU is currently trading at about a 25% discount to market, so I value SU at 36, using a conservative 2012 price of $90 for West Texas Intermediate crude oil.
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