Suncor (TSX:SU) stock is down 17% in the past couple of weeks. Contrarian investors are wondering if SU stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends.
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Suncor share price
Suncor trades near $46.50 at the time of writing compared to $56 earlier this month. The 12-month low is just below $44.
Falling oil prices are to blame for most of the weakness. West Texas Intermediate (WTI) oil trades near US$61 at the time of writing compared to US$85 at this time last year. Oil prices rebounded a bit in recent days on hopes that trade deals will be reached between the United States and the rest of the world to avoid plunging the global economy into a major recession.
A weak Chinese economy and rising production from non-OPEC countries, including Canada and the United States, drove much of the downside for oil prices over the past 12 months. The launch of the trade war by the United States in 2025 has put additional downward pressure on the oil market. Lower oil prices translate into lower gasoline and diesel fuel prices for households and businesses. The U.S. administration wants oil prices to remain low for this reason, so there could be additional headwinds for the market.
OPEC also recently announced plans to increase supply, even as prices are under pressure. If the consortium follows through on the commitment, oil will have trouble finding a way to move materially higher.
On the positive side, there is a chance that the U.S. will iron out reasonable trade deals. Any indication of a deal with China would likely send oil prices meaningfully higher, at least in the short term.
Outlook for Suncor
Suncor delivered a solid performance in 2024 despite the slide in oil prices. Normalized free funds flow increased by $2.3 billion, supported by record upstream production and record refining throughput. Sales of refined products also hit record volumes in every quarter of the year. At the same time, total operating, selling, and general expenses fell by $300 million, even with the big jump in product volumes.
Suncor is best known for its oil sands oil production, but the company also has large refineries and a portfolio of retail locations that operate under the Petro-Canada brand. The integrated nature of the business should enable Suncor to navigate lower oil prices better than the pure-play producers. Falling input costs for the refineries can boost margins on the sale of the end products. Lower fuel prices tend to entice people to drive more. In 2025, Canadians could decide to travel more within the country for vacation instead of heading to the United States.
The opening of the Trans Mountain pipeline expansion last year gave Canadian oil producers additional access to global markets. Renewed interest in building east-west oil and gas pipelines could lead to additional capacity in the next few years. That would help Suncor get its product to more international buyers.
Dividends and share buybacks
Suncor continues to return more cash to shareholders. The board recently raised the dividend by 5%. Suncor reduced debt by $1.1 billion in 2024, bringing net debt down to the $8 billion target. This means Suncor will start returning 100% of excess funds to shareholders through share buybacks.
At the time of writing, the stock provides a dividend yield of 4.9%.
Should you buy now?
Near-term market volatility is expected and additional downside is possible for Suncor’s share price if oil prices continue to fall. That being said, Suncor has made good progress on boosting output while reducing costs and is positioned well to ride out the turbulence in the market. Contrarian investors who are bullish on oil over the long term might want to start nibbling at this level. The current dividend pays you well to wait for the recovery.
