Should Suncor Stock Be Part of Your Portfolio in 2022?

Suncor is one of Canada’s largest companies and has delivered stellar returns to investors in the last year.

| More on:

Canadian oil giant Suncor (TSX:SU)(NYSE:SU) has been among the top performers on the TSX in the last year. Since May 2021, Suncor stock has surged close to 75%, compared to the 8% returns of the TSX. Despite its market-thumping gains, the company also offers investors a dividend yield of 4%, making it attractive to income investors as well.

Let’s see if Suncor can continue to derive outsized gains for investors in 2022 and beyond.

Suncor is focused on lowering debt

Suncor operates oil sands, which means the company has to dig up oil-rich soil and process it to extract oil. While oil sand assets require a significant amount of capital expenditure to build, they have low operational costs as well as long production lives. In addition to oil sands, Suncor also has a refining operation that diversifies its revenue base.

Similar to most other energy companies, Suncor is well positioned to benefit from higher oil prices, which should improve earnings and cash flows significantly this year. Analysts tracking the stock expect revenue to rise by 38% year over year to $54 billion in 2022, while adjusted earnings might more than double to $6.6 per share.

Suncor is valued at seven times forward earnings and continues to trade at a reasonable multiple. Its operational improvements and supportive market conditions have increased free cash flow at a stellar pace, driving shareholder returns higher and accelerating the pace of debt repayments.

In Q1, Suncor repurchased shares worth $830 million and reduced debt by $730 million. Its board of directors increased quarterly dividends by 12% to $0.47 per share, which is the largest dividend hike in the company’s history.

Suncor expects to use around 50% of its free funds flow to repurchase shares and the rest to lower its debt until the company’s net debt reaches $12 billion. Once it achieves its net debt target, Suncor will allocate 75% of free cash flow towards buybacks and the rest towards debt reduction, until net debt touches $9 billion. Suncor claims it expects to achieve its net debt target of $12 billion in the second half of 2022.

How did Suncor perform in Q1?

In Q1 of 2022, Suncor’s adjusted funds from operations stood at $2.86 per share, which was 30% higher than its previous quarterly record achieved in Q4 of 2021. Its disciplined execution of capital allocation allowed the company to return $1.43 billion via dividends and buybacks, which indicates annualized returns of 11% given Suncor’s average stock price in the quarter.

In Q1, Suncor’s adjusted funds from operations from its oil sands business stood at $3.4 billion with an average realization of $115 per barrel. Due to Suncor’s marketing and logistics advantage, its bitumen realizations stood at $103 per barrel, which is above the sector benchmark.

Analysts remain optimistic about Suncor stock and have a 12-month average price target of $50, which is 8% above its current trading price. After accounting for its dividend yield, annual returns might be over 12% in the next year.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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 »