Better Energy Stock: Suncor Energy (TSX:SU) or Canadian Natural Resources Ltd (TSX:CNQ)?

Suncor Energy Inc. (TSX:SU)(NYSE:SU) outperformed Canadian Natural Resources Ltd (TSX:CNQ)(NYSE:CNQ) last year, but is it the better buy?

| More on:
The Motley Fool

Editor’s Note: A previous version of this article incorrectly stated Suncor’s dividend yield as 7.9%. It has since been corrected to 3.6%.

Investors in search of defensive stocks with high dividend yields often turn to the energy sector. This sector was a bit of a letdown last year, however, with average losses that were worse than that of the TSX. As a result, many energy stocks are trading at a discount. Let’s consider two Canadian energy stocks: Suncor Energy (TSX:SU)(NYSE:SU) and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ).

Which is the better buy right now?

Suncor Energy

SU is one of the largest Canadian integrated oil companies. The firm specializes primarily in extracting oil from the oil sands of Alberta. While oil sands have the potential to produce considerable revenue for the company because of their rarity and the quality of the oil they produce, the costs SU incurs through the production process are substantial.

Net income grew in every quarter of 2018 for SU and even doubled from the second to the third. The company’s third-quarter results also showed a 27% increase in funds from operations. SU paid out $582 million in dividends during this quarter. The company’s current dividend yield is 3.6%, and SU increased its dividend per share by 64% over the past four years.

One of SU’s main weaknesses is its lack of diversification. The company generates most of its product from the same region and relies on the proper facilities, infrastructures, and modern technological advances to maximize output. Any serious problem in the chain of production can lead to disastrous financial consequences for the Calgary-based company.

Canadian Natural Resources

CNQ is one of the largest producers of heavy crude oil and natural gas in Canada. The company’s operations span across much of northern Canada and extend abroad to some parts of the U.S., Europe, and Africa. Most of CNQ’s production is focused in North America, though, and the company generates the majority of its revenues and profits from this region.

CNQ’s share price has decreased by more than 30% since the beginning of 2018, despite the company’s solid financial performance throughout the year. SU’s third-quarter earnings report showed a year-to-date increase in revenue of 49%. The company’s net income soared by 68% over the same period, which shows an increase in operating efficiency — a critical factor for energy companies.

CNQ increased its dividend per share by 48% over the past four years. The company’s dividend yield currently sits at 3.7%, which is relatively low compared to many of its competitors. The firm generates more than enough cash flows to cover dividend increases. CNQ’s quarterly cash from operations increased by more than 117% since the first quarter of 2017.

The bottom line

While SU had a better year on the stock market, CNQ had better financial results. CNQ’s operations are more diversified, which provides more avenues for growth. SU’s operations are concentrated in one specialized market, and although this market has great potential, SU’s earnings are more sensitive to adverse economic conditions.

At this moment, CNQ seems like the more attractive choice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Prosper Bakiny has no position in the companies mentioned. 

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »