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A pedestrian is reflected in a Suncor Energy sign in Calgary, Monday, Feb. 1, 2010. (Jeff McIntosh/THE CANADIAN PRESS/Jeff McIntosh/THE CANADIAN PRESS)
A pedestrian is reflected in a Suncor Energy sign in Calgary, Monday, Feb. 1, 2010. (Jeff McIntosh/THE CANADIAN PRESS/Jeff McIntosh/THE CANADIAN PRESS)

Eye on Equities

Analyst urges Suncor to hand out much bigger dividend Add to ...

Suncor Energy Inc. hiked its quarterly dividend this week, but Raymond James analyst Justin Bouchard argues the company should be much more generous in shoveling out income to shareholders.

In a conference call to discuss the company’s first-quarter results, management highlighted that it wants the dividend -- which now yields about 1.6 per cent annually -- “to be meaningful, competitive and sustainable,” Mr. Bouchard notes.

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“We would argue that the current dividend is neither meaningful nor competitive -- at least relative to other comparable exploration and production companies,” which average a dividend yield of about 3.7 per cent, he said.

Suncor, he says, is in an enviable position. Its balance sheet has significant flexibility, with considerable cash flow and lots of potential to grow its operations organically. But whether it should grow -- instead of focusing on rewarding shareholders with cash -- is another question.

“From a growth perspective, there are very few similar sized companies that can grow at the rates Suncor is proposing,” Mr. Bouchard said. “However, from a total return perspective -- the big question is whether it makes sense to grow aggressively or rather to moderate growth rates and boost the dividend.”

If the company grows aggressively, there’s the potential for inflating costs in the oil sands eroding the already razor thin returns on mining projects ever further,” he said.

Whether Suncor boosts its dividend further or not, Mr. Bouchard is recommending the stock.

“We continue to believe that investors should take a close look at Suncor for a number of reasons -- the company’s balance sheet is in very good shape, the company is committed to returning cash to shareholders and from a valuation perspective, it is trading at attractive levels. However, we are still concerned about spending levels over the next four or five years and the impact of low (or non-existent) returns on oil sands mining projects.”

Upside: Mr. Bouchard reiterated a six to 12-month price target of $43 and “outperform” rating.

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CIBC World Markets analyst Perry Caicco has upgraded Alimentation Couche-Tard Inc. to “sector outperformer” following discussions with management that centred on its $2.8-billion deal to buy the retail unit of Statoil ASA. He raised his earnings estimates on the convenience store operator for the next two years as he made favourable revisions to tax rate and gross margin expectations.

Upside: Mr. Caicco raised his price target by $8 to $51.

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Loblaw Cos. Ltd. “has an enormous task ahead of it,” commented CIBC’s Perry Caicco after the grocery giant reported weak same-store sales growth of plus 0.2 per cent in its latest quarter. Mr. Caicco dropped his earnings estimates as he grew more pessimistic on the sales outlook, believing it may take at least three more years for Loblaw to achieve a significant boost in earnings growth.

Upside: Mr. Caicco dropped his price target by $1 to $39 and maintained a “sector performer” rating.

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Desjardins Securities analyst Adam Melnyk has slashed his price target on West Kirkland Mining Inc. in anticipation that the company will have to issue more equity to fund operations. He also scaled back his expectations for the size of the company’s TUG gold-silver deposit in Nevada. “West Kirkland represents a highly speculative investment with the potential for significant share price appreciation should the company’s exploration work successfully delineate mineral resources at its projects in Nevada and/or Kirkland Lake,” he said.

Upside: Mr. Melnyk cut his price target to $1.30 from $2 but maintained a “buy” rating.

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Constellation Software Inc. reported lower-than-expected first-quarter earnings and revenue, but cash flow remained robust. Versant Partners analyst Tom Liston believes the stock should be a core holding for investors, citing its “best in class” management team to execute on its acquisition strategy.

Upside: Mr. Liston cut his price target by $2 to $105 and maintained a “buy” rating.

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