Wednesday, March 18, 2015

Suncor Energy - Do I stay or do I go?

     Over the last four months, I've owned shares of Suncor Energy Inc. ("Suncor") three times. In each instance, I used my over-reaction/speculation/hunch money to purchase shares. My position in the company has never represented a significant portion of my portfolio; possibly 4% at it's highest point, and about 3% now. The first two times I owned Suncor, I made small profits holding the position for a month or two, collecting a dividend, and getting rid of it when the price of oil recovered slightly. After buying into the company again early this month in my Tax Free Savings Account ("TFSA") at $37.60 (CAD) in order to collect the latest dividend, I'm slightly in the red at this point. The fact I'm a little underwater on the position doesn't bother me at all. In fact, I've been thinking about holding onto Suncor. In order to help myself make the decision whether to stick with Suncor for the long-term, or sell it if/when the price of oil recovers some, I decided to go through the main pros/cons below.

Selling Suncor:
- I'm trying to organize my various stock holdings in the most tax efficient way. Suncor would be much better held for the long-term in my taxable account (relatively low dividend yield compared to my other investments) as opposed to my TFSA where I aim to hold higher yield stocks and REITs.
- Selling Suncor would help fund my portfolio transformation as I had plans to buy shares of Rogers Communications in my TFSA (higher yield and where I already hold most of my Rogers shares).
- Suncor barely meets my dividend yield screening requirement of 3%. This makes me question if the company's management considers the dividend important, or if they would consider cutting it if the price of oil continues to be depressed.
- I question the sustainability of Suncor's dividend given its Q4 EPS of $0.06 and $0.28 dividend. In 2014 (when the price of oil was higher), the company looks to be slightly cash flow negative when CAPEX, dividends, and share buybacks are taken into account.
- I try to avoid investing in commodity based businesses. Commodity based businesses tend to be price takers and have to react to consumer demand. There's little ability to differentiate or charge premium pricing.

Holding Suncor:
- In terms of dividend growth, averaging 36% per year over the last 5 years is beyond many of the companies in which I hold shares. Suncor boosted it's dividend by 40% in 2014 alone.
- Suncor is an excellent life hedge for me. Even though we don't drive very frequently, my wife and I both buy gas a couple times a month, and knowing I'll be getting some of those dollars back via dividends will make me feel better about the fuel expense.
- I bought a full position (by my definition) in the company in my TFSA, and I'll still have enough cash to fund my purchase of Rogers when I make my 2015 TFSA contribution.
- Suncor gives me some exposure to the exploration/extraction/distribution/retail of oil products, an area where my portfolio is currently lacking.
- Holding Suncor in my TFSA, where any capital gains down the road are not taxed, might prove to be tax efficient in the long-term if I'm buying into the company at a low point in the industry cycle.

     There are two other factors that are playing into my hold or sell decision:
- I'm not sure if I want to continue dedicating a portion of my portfolio (about 5%) to over-reaction/speculation/hunches. This is definitely the money I think and worry the most about. There's something to be said for boosting my portfolio return by a couple percentage points (as I did last year with this money), but I'm also all for sleeping better at night.
- I'm not 100% happy with the price at which I bought my latest shares. I bought into Suncor at a P/E around 20X, which seems a bit high given the difficulties in the oil market. When Suncor goes below $35 (as it did earlier today), I think that would have been a much safer entry point. That said, I know it's impossible to pick bottoms in a stock or the market.

     Clearly, I'm continuing to struggle with what to do with my Suncor holding. As long as the current price stays below my latest entry point, I'm happy to hold my position and not have to make a decision. I wonder if I'm the only one who agonizes over when/if to sell stock?

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