Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
SU’s dividend Growth Score is 7, suggesting that the company’s dividend growth potential is weak. With the rapid decline in oil price, this is no surprise. Furthermore, with potential opportunities to purchase competitors at $0.75 on the dollar, we would rather see SU continue investing for the long term than substantially up the dividend in this environment. Collecting a 3.7% yield and waiting for much better returns in future periods is worthwhile.
As seen below, SU has increased its dividend for 13 straight years and most recently hiked its dividend by 3.6% during the summer of 2015. As seen below, SU’s dividend has nearly tripled over the last five years (all figures below are in Canadian dollars).
Source: Simply Safe Dividends
Once oil prices begin to normalize and SU’s growth projects start ramping up (end of 2017), dividend growth potential should meaningfully improve.
While SU is not eligible to join the S&P Dividend Aristocrats Index, (it is not a member of the S&P 500), it has many of the characteristics we like to see in consistent dividend growth stocks.
Valuation
SU trades at 25x forward earnings and offers a dividend yield of 3.7%, making the stock attractive for investors living off dividends in retirement. From an earnings multiple perspective, cyclical stocks typically look “expensive” when earnings have troughed and cheap when earnings are peaking – the market is forward-looking.
Consensus earnings estimates call for SU’s profits to come in close to where they were during 2009. We think it is very reasonable to assume that the company’s profits could at least double or triple over the next 2-4 years as a result of higher production levels (growth projects come online in late 2017), additional cost savings, and potentially higher oil prices (even back into the $40s or $50s per barrel would likely be enough).
If such a scenario played out and the stock traded at 15x earnings, it could trade closer to $35-$40 per share (up from $23.50 today). It’s hard to see how things get worse from here unless SU makes a dumb acquisition and oil falls into the $20s.
Conclusion
Suncor Energy Inc. (USA) (NYSE:SU) has a world-class resource base, an extensive logistical network, proven capital allocation abilities, extremely low-cost production, and substantial operational excellence. It’s no surprise that this company is one of Warren Buffett’s two holdings in the energy sector.
We believe the dividend is very safe and that SU’s financial health has positioned it extremely well to take advantage of its distressed competitors. Whenever oil prices start to normalize, SU will emerge much stronger than it was going into the slump. We are happy to collect SU’s 3.7% yield in our Conservative Retirees dividend portfolio and patiently wait for better times ahead.
Disclosure: None
