Suncor Energy Attracts Value Buyers with Their Dividend Hike and Buybacks

Suncor Energy (SU), a major Canadian oil and gas company, is attracting value investors with its recent dividend hike, putting SU stock on a 4.8% dividend yield. They also like Suncor's huge buyback program which works out to about 7.3% of its $42.3 billion market value.

As a result, value investors like the stock since it has a total yield, including dividends and buybacks, of about 12% annually. That suggests the stock could rise much further.

Attractive Dividend Yield and Buybacks

For example, the company recently raised its dividend by 11% to 52 cents Canadian. Since the FX rate is about US0.74 per Canadian dollar, that puts the quarterly dividend at 38.48 cents or about $1.53 annually. Since SU stock is trading at $31.61 on Dec. 30, that gives it a dividend yield of 4.84% (i.e., $1.53/$31.61).

In addition, the company reported on Nov. 15, that its cash flow was very strong and it had bought back $1.0 billion Canadian worth of its shares during Q3. In fact, here is what Suncor said in its Q3 earnings release on Nov. 15 about its cumulative share repurchases:

“As at October 31, 2022, since the start of the year, the company has repurchased approximately $4.6 billion of its common shares, representing approximately 104.7 million common shares at an average share price of $44.01 per common share, or the equivalent of 7.3% of its common shares as at December 31, 2021.”

That implies that Suncor is on track to potentially buy back 8.76% of its shares. That would occur if the same pace of buybacks continues during the rest of Q4 (i.e., with an additional 1.46% of its shares repurchased during November and December).

As a result, including the 8.76% buyback yield plus the 4.84% dividend yield, this results in a total yield to shareholders of 13.6%. This is significantly above the run rate total yield of 12% mentioned above.

SU stock would move higher not only due to the higher pressure on the stock from the buybacks but also due to the lower number of shares outstanding. For example, buybacks tend to increase earnings per share (EPS) due to fewer shares in the EPS calculation. It also will allow Suncor to raise the dividend per share for the same amount of dividends paid out as before.

Where This Leaves Investors In SU Stock

As I have written before in relation to Chevron (CVX) stock, energy stocks with high total yields tend to do well over time. Morningstar actually tracks the historical buyback and dividend yields for each stock it covers. For example, for the past 5 years, Morningstar says that the average total yield for SU stock has been just 7.78%, compared to 13.6% now. 

This implies that SU stock could potentially rise by almost 75% from here, just if it were to trade at its historical total yield. Here is how you can calculate this. First, we can convert the total yield into a multiplier. For example, the inverse of 7.78% is the same as 12.85x its dividends and buybacks (i.e. 1/0.0778 = 12.85). The inverse of 13.6% is 7.35x.

Next, if we divide 12.85x by 7.35x, we get 1.748. After subtracting 1, we get a return of 74.8%.

Now, just to be conservative, let's use the 12.0% total yield factor mentioned above. This equates to a multiple of 8.333x. Therefore, dividing 8.333x by 7.35x suggests that SU stock could still rise by 13.34%.

That gives value investors a minimum price target of $35.83 per share. It could potentially rise to $55.25 per share (+74.8%). On average we can expect SU stock to eventually rise to $45.54 per share or 44% over today's price. That is why value investors like SU stock now.

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