Suncor Energy (SU +2.58%) has treated its investors well over the years. For example, it has delivered 15 consecutive annual dividend increases, which have helped fuel a total return of greater than 400% over that timeframe, more than doubling the total return of the S&P 500. That history of outperformance has earned it my admiration, though as much as I like what Suncor has done for investors in the past, I'm even more excited about what it has in store for them in the future. Here are four things I love about what the company offers investors who hold for the long term.
No. 1: It has rock-solid financials
One of Suncor Energy's best features is its balance sheet. The Canadian oil giant set conservative leverage targets of a net debt-to-funds from operations (FFO) ratio of less than 3.0 times, and it plans to keep its total debt-to-capitalization between 20% to 30%, which should ensure that it has the financial flexibility to navigate the turbulent oil market. However, as of the end of the second quarter, the company's actual metrics were 1.7 times and 26%, respectively, which support its strong investment-grade credit rating. Further, it has ample liquidity at 8.1 billion Canadian dollars ($6.5 billion), including CA$2.4 billion ($1.9 billion) in cash and CA$5.7 billion ($4.5 billion) of available credit. Given these numbers, the company has the financial capacity to weather another oil market storm.
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No. 2: It offers stability in a volatile industry
Another great feature of Suncor Energy is its production profile. Because the bulk of its output comes from the oil sands, it has a very low production decline rate given the nature of those assets. In fact, some of its facilities can produce at the same rate for decades. The net result is that the company doesn't need to invest much capital to maintain its production rate. That has made it easier for the company to continue growing during the oil market downturn even as many rivals, especially U.S. shale, saw their production fall because those wells have very high decline rates.
No. 3: It pays a sustainable and growing dividend
Because Suncor Energy doesn't need to spend as much money to maintain production, it generates excess cash that it can return to shareholders, including paying a generous dividend. At the moment, Suncor Energy yields 2.9%, which is well above the 1.9% yield of the S&P 500 and the 2.1% average yield of most oil companies. As mentioned, Suncor has increased that payout for 15 straight years, including boosting it 140% over the past five years. Further, the company should have no problem supporting its current payout since it just needs oil to average $37 per barrel to provide it with the capital necessary to sustain its production rate and pay the dividend.
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No. 4: It's focused on per-share growth
Finally, one thing that sets Suncor Energy apart from many rivals is its focus on growing production per share as opposed to targeting an absolute growth rate. Driving that focus is the company's plan to use some of its excess cash flow to repurchase stock as opposed to increasing the amount spent on lower-return growth projects. Currently, the company expects its combination of growth initiatives and buybacks to boost per-share production by a 10% compound annual growth rate through 2019, which is an acceleration from the 6% compound annual growth rate per share it delivered from 2012 to 2016.
More rivals are shifting their attention to growing production per share because the focus on absolute production growth hasn't paid off given the volatility of oil prices. U.S. oil giant ConocoPhillips (COP +0.53%), for example, recently unveiled a $6 billion stock buyback, which should juice its per-share growth rate. Under ConocoPhillips' current forecast, its asset sale adjusted production should rise by 3%. However, after factoring in the $3 billion in stock it plans to repurchase this year, the per-share rate would be a much more robust 8%.
This focus on per-share growth also forces Suncor Energy to seriously consider the impact a secondary offering would have on its ability to deliver compelling per share growth. As such, it would only issue stock to make an acquisition or finance expansion projects if the investment would be accretive on a per-share basis. That helps mitigate the risk that the company starts chasing growth for the sake of growth in the future.
A stable oil stock for an uncertain time
Suncor Energy has everything I love to see in an oil company, including a top-notch balance sheet, a generous dividend, and visible growth. Those factors could become increasingly important over the coming years given the view that oil prices could bounce around, which would cause fits for shale drillers given their high decline rates. However, because of Suncor's production stability, it should continue to generate steady growth, which has the potential to fuel compelling total returns for long-term investors.
