SU Stock: This Is Why Warren Buffett Is Buying Suncor Energy Inc.

SU StockWarren Buffett Is Buying Suncor Stock

Berkshire Hathaway’s investment in Suncor Energy Inc. (NYSE:SU) stock reveals a big part about how Warren Buffett picks companies.

Not sexy stocks, mind you. Not the kind of stocks that will make you the talk of your next cocktail party.

Suncor reveals how Warren Buffett identifies wonderful businesses. Businesses that have made him 500%…3,500%…even 10,000% gains. Businesses so good, you can almost buy and hold them forever.

All in all, I dare say this could be the most valuable article you will ever read on the subject.

The Warren Buffett School of Investing

Suncor is my favorite way to invest in oil—and now Warren Buffett agrees with me.

Last quarter, Buffett upped his stake in the energy company. In a recent Securities and Exchange Commission (SEC) filing, Berkshire disclosed that it owned 30 million shares. This position was valued at $774.0 million as of year-end. (Source: “Berkshire Hathaway 13-F,” SEC, February 16, 2016.)

For Buffett, though, Suncor looks like an odd buy. The company’s profits plunged after the drop in oil prices. The stock isn’t even that cheap, given shares trade at a premium to peers.

Historically, Buffett has also steered clear of the energy stocks. In the past, he has preferred consumer brands with durable competitive advantages. The oil industry is a commodity business, which doesn’t lend itself to high returns.

So what does the “Oracle of Omaha” see in SU stock? His investment comes down to two words…

Capital allocation.

I can almost see the eyes glazing over. Jargon like this puts most people to sleep. But the concept is the key to Buffett’s brilliance…and finding Buffett-like stocks of your own.

Suncor isn’t the fastest-growing. Nor is it the cheapest. But managers at the oil sands company are great stewards of shareholders’ money.

Since taking the helm in 2011, Suncor CEO Steve Williams has dialed back Suncor’s ambitions. His policy is as follows: each dollar invested back into the business must earn a sufficient return, otherwise, any extra cash will be given back to investors.

Analysts have noticed other changes, too. Suncor is no longer focused on sexy megaprojects. Rather, Williams is pushing for “debottlenecking” initiatives—industry slang for wringing more barrels out of existing operations.

This dull style won’t land Williams on the cover of Forbes magazine. His policy, though, has freed up a huge amount of cash for investors. Over the past four years, management has more than doubled SU stock’s dividend and repurchased more than 10% of its outstanding shares. (Source: “Suncor Investor Presentation Slide 7,” Suncor Investor Relations, last accessed February 19, 2016.)

Suncor Investor PresentationSource: Suncor Investor Presentation

Common sense? Sure. But such discipline is rare in the oil patch.

Most oilmen want to strike it rich on the next gusher. Yes, guiding over a larger empire might stroke executive egos, but a healthy self-esteem doesn’t put any money in your pocket.

Up until recently, the talk in the oil business was about expansion. How many barrels of oil can you haul out of the ground? How profitable those barrels would be to extract was a secondary issue.

For shareholder’s, though, this growth for the sake of growth is a bad idea. Suncor is focused on the Alberta oil sands. These are costly projects that run on thin margins—not the trademarks of a great business.

Say a friend approached you to invest in a private oil sands deal. You would likely demand a healthy return to justify the risk. But even with $100.00-a-barrel crude, a new oil sands mine would be a breakeven proposal at best.

The same applies to public companies like Suncor. Why plow profits back into these low-return ventures? A better idea is to milk existing assets and return earnings back to shareholders. This way, they can reinvest the money into better businesses elsewhere.

Hey, something Buffett is known for.

Unlike his peers, Williams isn’t pushing for growth at the expense of shareholders. Sure, this means running a smaller business. For owners, though, his policy will likely result in better returns.

And Suncor isn’t the only Warren Buffett pick with an appetite for its own stock. Consider Berkshire holdings like Wal-Mart, Coca-Cola, and American Express. All of these firms have earned Buffett 1,000%-plus returns.

What else do they have in common? All three have long track records of buying back shares and paying out dividends. They do this even if that means slower growth and smaller egos.

The Bottom Line on Suncor Stock

Most research is focused on earnings, operations, and the economy. But for Buffett, the folks actually running the show are an important consideration, too. Can you actually trust the people handling your money?

Suncor’s management team passed that test. By buying back stock and focusing on less sexy projects, Williams has proven he will put shareholders first. Short of a polygraph test, this is the surest sign management is on your side.