Warren Buffett Added to Suncor (TSX:SU) Stock: Should You?

Suncor (TSX:SU)(NYSE:SU) stock is an attractive investment today. Once the tide turns, the stock can deliver incredible upside on top of its 4% dividend.

| More on:

Warren Buffett’s Berkshire Hathaway started a position in Suncor Energy (TSX:SU)(NYSE:SU) stock in Q4 2018, during which the energy stock traded as low as $34 a share.

Essentially, Suncor stock has been on a slide since. At writing, it trades at below $21 per share, down about 38% from the $34 level.

Suncor stock offers more than just the dividend

Suncor Energy used to be a blue-chip dividend stock. Heck, it even announced a dividend hike of 10.7% in February that would have marked the year 2020 its 18th consecutive year of dividend growth — if it didn’t cut its dividend by a hefty 55% in May.

The COVID-19 pandemic was a quick turn of events that promptly changed the near-term outlook of the energy sector.

Warren Buffett loves dividends. Understandably, in late 2018, Suncor stock’s dividend was still sustainable. The advent of the pandemic outbreak in early 2020 immediately made Suncor stock’s dividend much less certain. Then why did Berkshire add an extra 28% of Suncor stock in its stock portfolio in Q2?

The stock must offer more than just its dividend. The other component in the total returns equation is price appreciation.

A better H2 outlook

Due to the COVID-19 pandemic and other factors, the first half of the year (H1) was bad news for Suncor and other energy stocks. In Q2, Suncor reported revenue of $4.2 billion, down 58% from the prior year’s quarter. Net loss of -$614 million was more than five times worse than the net income posted in the prior year’s quarter. The diluted loss per share was also five times worse year over year.

Since the H1 results were horrible, the results of H2 and 2021 are expected to be much better.

Suncor stock is a good buy now

Currently, at $20.89 per share a piece, Suncor stock is trading at even lower levels than the Q2 trading range. In other words, investors can buy the stock at a cheaper price than Berkshire Hathaway. But should they take a position?

Here’s what Suncor stock offers today.

Suncor’s quarterly dividend is $0.21 per share. Despite a dividend cut, because the stock has declined 45% from a year ago, it still yields a good 4% yield from current levels.

Investing is forward looking. Irrespective of how badly the energy stock has done in the past year, investors must make an educated guess on where it will be 12 months to five years from now, depending on their investment horizon.

Analysts have a 12-month average price target of $31.90 per share on Suncor stock, which suggests there’s near-term upside potential of nearly 53% on top of the 4% dividend.

This makes Suncor stock a very attractive total return investment.

The Foolish takeaway

Suncor still maintains a decent investment-grade S&P credit rating of BBB+. It offers more than just a 4% dividend today. A 12-month price appreciation of more than 50% is also in the cards.

SU Chart

SU data by YCharts.

Suncor stock is trading at a cyclical low — levels last seen in the previous recession about 11 years ago. An investment in the stock today can double in three to five years from price appreciation alone.

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 Kay Ng owns shares of Berkshire Hathaway (B shares) and Suncor. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).

More on Energy Stocks

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold for 2025?

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »