Between rising interest rates, inflation, war in Ukraine, supply chain disruptions and the lingering effects of the pandemic, stock market investors have plenty of things to worry about.
Wouldn’t it be nice if there was a company you could count on to deliver predictable earnings and dividends, no matter what else happened to be going on in the world?
Well, turns out there is.
TC Energy Corp. (TRP) – formerly TransCanada Corp. – may be just the antidote investors need to cope with the current global turmoil. Here’s why:
A recession-resistant, low-risk business model
We all want the world to get off fossil fuels as fast as possible, but the reality is that the transition to clean energy will take many years. In the meantime, people will still need natural gas to heat their homes and businesses, generate electricity and keep industry running. Calgary-based TC Energy derives more than three-quarters of its earnings before interest, taxes, depreciation and amortization from natural gas pipelines in Canada, the United States and Mexico, with the balance coming from liquids pipelines and power generation and storage. What’s more, about 95 per cent of TC Energy’s EBITDA comes from operations that are either regulated or sold under long-term contracts, contributing to earnings stability.
Lots of growth opportunities
Even though the Keystone XL Pipeline project is dead, TC Energy still has plenty of growth ahead. Of the company’s $25-billion capital spending program, the bulk is for natural gas pipeline projects. Natural gas is expected to play a growing role in the transition to a lower-carbon future, displacing dirtier coal in power generation and providing a reliable backup to the intermittent power from wind and solar. The war in Ukraine has only highlighted the importance of a secure natural gas supply, as sanctions against Russia have led to supply disruptions, higher prices and rising European demand for liquefied natural gas (LNG) from North America. This has contributed to “improved sentiment around natural gas as a transition fuel, which should in turn support development of North America’s natural gas reserves and infrastructure,” Matthew Weekes, an analyst with iA Capital Markets, said in a recent note.
Contributing to the energy transition
At the same time, TC Energy is investing in its Bruce Power nuclear generation assets (nuclear power is seen by many as critical to achieving greenhouse gas reduction goals) and in other decarbonization initiatives. These include replacing traditional gas-powered compressor units along its pipelines with electric motors and, longer term, pursuing hydrogen production and carbon capture and storage projects.
A well-protected – and growing – dividend
With stock markets surging over the past couple of years, it’s gotten harder to find companies with juicy dividend yields. But because TC Energy’s stock has lagged the market, it still yields about 5 per cent. You can’t get that with a bank or utility. What’s more, TC Energy has raised its dividend for 22 consecutive years and plans to continue increasing it by about 3 per cent to 5 per cent annually, supported by its growing earnings and cash flow. Granted, that’s lower than its dividend growth in previous years, but it’s consistent with the company’s goal to have a conservative payout ratio – currently it’s about 50 per cent of distributable cash flow – and to reinvest more of its cash internally to fund growth.
A reasonable valuation
TC Energy is a utility-like business – but without the utility-like valuation. Because the shares have been held back by uncertainties about the future of fossil fuels, the stock now trades at a discount of about 21 per cent on a price-to-earnings basis compared with regulated utilities, Robert Kwan, an analyst with RBC Dominion Securities, said in a recent note. At a recent P/E of about 16 times estimated 2022 earnings, the shares are trading toward the low end of their historical valuation range. “We believe that as the market focuses more on energy security, as well as the company’s energy transition opportunities (both near-term and long-term), there is the potential for valuation multiple expansion,” Mr. Kwan said.
Closing thoughts
TC Energy isn’t going to make you rich overnight. The median 12-month price target of the 22 analysts who follow the company is $72.50, which is only slightly ahead of the stock’s closing price on Friday of $71.43. However, if you’re seeking reliable and growing income, with the likelihood of modest capital gains over the long run, it might be worth a closer look. Remember to stay diversified, and be sure to do your own due diligence before investing in any security.
Full disclosure: The author owns shares in TRP.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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John Heinzl