The energy sector has generated outsized returns to investors in the last two years, as the reopening of economies, geopolitical tensions, and rising demand drove oil prices to multi-year highs in 2022. While crude oil prices have decelerated in recent months amid a challenging macro environment, energy stocks such as Suncor (TSX:SU) are also trading 25% below 52-week highs.
Alternatively, the market selloff has driven the dividend yield of Suncor stock higher, which stands at a tasty 4.5%. So, let’s see if you should buy Suncor stock for its attractive dividend yield in 2023.
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The bull case for Suncor stock
A Canada-based energy company, Suncor has focused on developing the country’s Athabasca oil sands, which is among the largest petroleum resource basins globally. Back in 1967, Suncor was the first company to produce crude oil for commercial use from these oil sands in Alberta. It has since grown in size to enjoy a distinguished position as one of Canada’s largest integrated energy companies.
Suncor’s oil sands operations recover bitumen via a combination of mining and in situ development. It then either upgrades the bitumen on site or transports the commodity to other markets, where it can be used as a by-product or diesel fuel.
These core oil sand products are further complemented by Suncor’s offshore assets that generate stable and low-cost cash flows.
Suncor operates four refineries that have a combined capacity of 460,000 barrels per day. The company also owns the largest ethanol farm in Canada and a network of over 1,500 retail and wholesale outlets, where North American consumers can purchase these sources of energy.
Similar to other oil and gas companies, Suncor is also investing heavily to expand its base of cash-generating clean energy assets, which will be a key driver of earnings in the next decade.
Suncor stock is up 400% in the last 20 years after adjusting for dividends. In this period, the energy giant has increased dividends at an annual rate of 16.4%, which is remarkable for an oil and gas company.
Suncor has returned around 60% of its cash flows to shareholders via dividends and share repurchases in the last 10 years. It is looking to invest around $5.5 billion towards capital expenditures, which will drive future cash flows higher and support dividend payments.
Armed with an investment-grade balance sheet, and a manageable debt-maturity profile, Suncor stock might continue to beat the TSX, especially if oil prices remain elevated.
The bear case for Suncor stock
Investors should understand that the energy sector is quite cyclical. So, Suncor and its peers thrive during periods of economic expansion and underperform the index benchmarks in a market downturn.
There is a possibility for consumer demand to decline at an accelerated pace in the next 12 months, especially if recession fears come true. While Suncor offers investors a solid dividend yield today, it rolled back these payouts during the onset of COVID-19 to strengthen its balance sheet.
You can invest in Suncor if you are bullish on the energy sector. Suncor stock trades at a reasonable valuation and at a discount of over 30% to consensus price target estimates.
