The share prices of Suncor (TSX:SU) and TC Energy (TSX:TRP) are down considerably from their highs last June. Investors who missed the big rallies off the 2020 crash are wondering if SU stock or TRP stock is now oversold and good to buy for a self-directed portfolio focused on dividends and total returns.
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Suncor
Suncor is a bet on oil prices and the demand for gasoline, jet fuel, and diesel fuel. The Canadian oil sands giant has oil production, refining, and retail operations. This integrated structure historically helped Suncor ride out downturns in the oil market. Lower oil prices hurt margins for the upstream operations, but they also reduce the feedstock costs for the refineries that can potentially see big margins when they sell the finished products. Retail can also get a boost when oil prices fall as the resulting decrease in fuel prices can drive higher consumption.
Suncor trades for less than $40 per share at the time of writing compared to $52 in June last year. The stock has underperformed its oil sands peers in the past couple of years.
Suncor decided to cut its dividend by 55% in the early days of the pandemic while its competitors maintained their distributions. The decision upset long-term investors who relied on Suncor’s stable payout. As oil prices rebounded in 2021 and 2022, the board reversed the cut and even raised the dividend to a new high, but investors are still not giving Suncor stock any love.
This could be a contrarian opportunity. Suncor has a new chief executive officer who plans to turn the business around and drive better investor returns. the company recently announced a plan to cut 1,500 positions as part of that process. Suncor used excess cash flow in the past two years to reduce debt and buy back stock. The balance sheet is now in better shape and Suncor should benefit from the rebound in fuel demand, as commuters head back to the office and airlines ramp up capacity to meet soaring travel demand.
Investors who buy SU stock at the current level can get a 5.25% dividend yield.
TC Energy
TC Energy doesn’t produce oil or natural gas. The company simply provides transmission and storage services to producers. Natural gas operations make up the largest part of TC Energy’s portfolio of nearly $120 billion in assets. The company has 93,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage in Canada, the United States, and Mexico.
International demand for North American liquified natural gas (LNG) is on the rise, as countries around the globe seek out reliable long-term supplies. Natural gas emits less carbon dioxide when burned, making it a better option than oil or coal for producing electricity. Gas-fired power plants can deliver reliable power when solar, wind, and hydroelectric power generation is unable to meet demand.
TC Energy also has oil pipelines and power facilities that round out the asset portfolio.
The board intends to raise the dividend by at least 3% annually over the medium term. This is supported by the $34 billion capital program in place through 2028. TRP stock trades near $54 at the time of writing compared to a high around $74 last year. The drop looks overdone, and investors can now get a dividend yield of 6.9%.
Is one a better pick today?
Suncor and TC Energy both look oversold and pay attractive dividends that should continue to grow. Oil bulls who can handle some turbulence might want to make Suncor the first choice. At this point, however, I would probably go with TC Energy. The dividend yield is higher, and the revenue stream is not directly impacted by changing commodity prices.
