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Is Suncor Energy's Dividend a Good Investment?

By Nicholas Rossolillo - May 7, 2016 at 3:27PM

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What has the company done historically with its dividend, and what is the future outlook?

Suncor Energy focuses on oil sand production in Northern Canada. Photo source: Suncor Energy.

It's been a tough two-year stretch for energy companies, and Suncor Energy (NYSE: SU) has not been an exception. The Canadian integrated oil company has seen shares slide since 2014, although a reprieve from recovering oil prices in recent weeks has helped the stock rebound some losses. Despite the miserable stock performance, Suncor's dividend might be enough to give the company consideration.

Standing out in the crowd
To investors dismay, several major energy companies have been forced to cut their dividends in recent months. The precipitous fall of oil prices in the last year has left many of these companies scrambling to conserve cash, cover expenses, and maintain flexibility during the downturn.  Suncor's dividend has weathered the downturn in oil very well. Armed with ample cash (over $4 billion at the end of fiscal year 2015) and the ability to lower operating costs (cash operating cost per barrel was reduced by almost 19% from last year), the company has been able to maintain its payout to investors. Q4 2015

For investors interested in income, not only is the stability of the dividend important, but increases to that dividend over time are also key. The cost of living rarely decreases, so a company that pays out an increasing amount of cash can help offset inflation for those that rely on their investments for a pay raise. Suncor is such an example, as the company has raised its dividend every year since it began paying in 1992. Here is the company's dividend history since 2007:

YearDeclared Dividend Per Share (Canadian Dollars)
2016 year-to-date $0.58
2015 $1.14
2014 $1.02
2013 $0.73
2012 $0.50
2011 $0.43
2010 $0.40
2009 $0.30
2008 $0.20
2007 $0.19

Chart data source: Suncor Energy. 

Income investors in Suncor over the past decade have no doubt been quite pleased with their increasing cash flow from the company. But can this trend continue? If so, what could investors expect to see?

The company recently made two investments for future growth. The first was the acquisition of Canadian Oil Sands Limited for about $6.6 billion. The second was its acquisition of an additional 10% working interest in the Fort Hills oil sands project from a subsidiary of Total for $360 million, bringing Suncor's share in the project up to 51%. The company believes both acquisitions will continue to drive value for shareholders.

Because of its strong cash and operating position, the company plans to spend about $6 billion to $6.5 billion in capital expenditures to drive growth. This continued investment, the cut in operating costs, and an anticipated rebound in oil prices later this year and into 2017 props up the company's earnings growth expectations..

After posting a loss per share of $1.38 in 2015, that loss is expected to reverse to only about $0.10 per share in 2016, and profit of about $1.00 per share is expected in 2017. Free cash flow generation covered total expenditures, including dividends, during 2015. The 2016 outlook is that cash generation will cover those costs again. Company management attributes this to the ability they have had to decrease costs as well as Suncor's diversified business across exploration, production, and refining of oil. As a result, the current dividend is certainly sustainable, but investors might have to wait a couple of years to see a significant increase again..

A good dividend in the oil industry
Despite the recent downturn in the global energy industry, Suncor has been able to maintain its pay to investors while simultaneously investing for future growth. For someone looking to live off investment income, Suncor Energy is one of the safer choices within the oil and energy industry. Once oil prices start to rebound, the company is in a good position to benefit. With a history of returning profits to shareholders, the company is a good choice for those looking for increasing dividends, but some patience may be required.

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