During TransCanada’s investor day on November 17th, 2015 – TRP announced that it will be increasing its common share dividend at an average annual growth rate of 8% to 10% through 2020; this certainly caught my attention. There’s nothing I like more than when a reputable dividend grower announces a specific dividend growth plan.
After the cross-border oil pipeline Keystone XL was rejected by Obama this past month (seven years after it was proposed), TransCanada announced they would spend $13 billion in small to medium sized projects which would come into service over the next three years while reviewing their options for larger projects, including the Keystone XL pipeline.
Four days after Obama had rejected the Keystone XL, TRP won a contract to build a $500-million (U.S.) natural gas pipeline in Mexico and announced a $427.9-million expansion of its Alberta gas network.
According to CIBC Investor’s Edge:
TransCanada Corporation (TransCanada) is an energy infrastructure company. The Company operates through three segments: Natural Gas Pipelines, Liquids Pipelines and Energy. Natural Gas Pipelines and Liquids Pipelines consist of its respective natural gas and liquids pipelines in Canada, the United States and Mexico, as well as its regulated natural gas storage operations in the United States. Its natural gas pipeline network transports natural gas to local distribution companies, power generation facilities and other businesses across Canada, the United States and Mexico. Its existing liquids pipeline infrastructure connects Alberta and the United States crude oil supplies to the United States refining markets in Illinois, Oklahoma and Texas, as well as connecting the United States crude oil supplies from the Cushing, Oklahoma hub to refining markets in the United States Gulf Coast. Energy includes its power operations and the non-regulated natural gas storage business in Canada.
Valuation
TransCanada Corp. (TSE: TRP) is currently trading at $42.48, down 25.6% YTD; 22.18% of which has been lost (stock price) in the past six months. TRP has a 52-week range of $40.68 – $59.50; meaning shares are down 28.61% from their 52-week high and 4.42% above their 52-week low.
TRP has a trailing P/E of 18.01; a 20% discount to it’s 5-year average of 21.7, and a 34% discount to the S&P/TSX COMP’s P/E of 26.5. TRP has a forward P/E of 15.9, an 18% discount to it’s 5-year average of 19.4, and a 39% discount to the S&P/TSX COMP’s forward P/E of 26.0. The Trailing P/E is looking quite good in relation to it’s average, and is below a P/E of 20, which satisfies requirements for ownership. The forward P/E is lower than the trailing P/E which shows that despite falling oil prices, this Canadian pipeline company is expecting to increase earnings. In fact, annual revenue is expected to increase 10.7% for 2015 and 14.9% in 2016. This results in EPS expectations of 2.47 for 2015 and 2.65 in 2016; trailing EPS currently stands at 2.36. With these expectations, TRP shouldn’t have a problem increasing the dividend 8 to 10 percent, at least through the end of 2016.
Thomson Reuters has placed a mean 12-month price target of $57.50 on the stock. This would represent a 39.3% gain in capital appreciation. They also have a Thomson Reuters Analyst Buy Recommendation, broken down as such: 1 Strong buy, 8 Buy, 6 Hold. Their 12-month high price target is $68.00 a share, and their low is at $45.00 a share.
Dividend
TransCanada Corp. pays an annual dividend of $2.08 CAD per share, representing a 4.90% yield. However, the 5-year yield average sits at 3.78%. TRP currently yields 1.12% more than on average in the past 5 years. Unfortunately, this dividend represents a payout ratio of 86.34%. While this is a little high in my books, due to their expected earnings increase and the number of projects they have, combined with their new dividend growth plan, I believe the dividend is indeed quite safe.
Dividend Growth
The 5-year yield growth rate sits at 4.78%; while this is a tad low, at least the company has consistently increased dividends for 15 years straight. The average 10-year yield growth rate is not much higher, at 5.17%. TRP appears to be set on doubling the average growth rate of their dividend with their recent announcement, which will definitely catch investors’ eyes.
Yield-on-Cost
Yield-on-cost is the lifeblood of the dividend growth investor. Without a decent yield-on-cost due to slow dividend growth rates or measly starter dividend yields, the DG investor loses a great deal of power over other investment methodologies.
Given TransCanada’s 4.90% dividend yield and it’s current 5.17% 10-year average dividend growth rate, the 10-year YOC for TRP is 8.11% – a great yield in my eyes.
However, with their new dividend growth expectations of 8 to 10 percent, the YOC will most definitely be even higher. While their new DGR is planned for the next 4 years, it won’t completely alter the 10-year average DGR, however it will skew it upwards.
As a fun exercise, let’s find out what the YOC would be if the 10-year average DGR was either 8% or 10%.
Considering TRP currently yields 4.90%, if it’s 10-year average DGR were 8%, the 10-year YOC for TRP would be 10.58%. Now, with a 10-year DGR of 10%, the YOC would be 12.71%.
From this we can deduce that TRP’s consistent dividend increases will bear a 10-year YOC of somewhere between 8% and 13%.
Conclusion
TransCanada Corp. (TSE: TRP) is a long-term Canadian dividend grower with 15 years of consistent increases. Despite the ongoing drop in crude oil, this pipeline company has kept strong results and offers double it’s average dividend growth going into the future.
TRP currently yields 4.90%, which is 1.12% more than it’s 5-year average. The current 5-year average DGR is 4.78%, but the dividend will now be increasing from 8% to 10% through 2020. TRP boasts a P/E of 18.01; a 20% discount to it’s 5-year average of 21.7, and a 34% discount to the S&P/TSX COMP’s P/E of 26.5. TRP has a forward P/E of 15.9, an 18% discount to it’s 5-year average of 19.4, and a 39% discount to the S&P/TSX COMP’s forward P/E of 26.0. Thomson Reuters has an average rating of BUY on this stock and has set a mean 12-month price target of $57.50. This would represent a 39.3% gain in capital appreciation.
What do you guys think of TRP? Let me know in the comments, I’d really appreciate it!
Great post DB. Makes me want to purchase more of this great stock which is pretty new in my portfolio too (few weeks old).
thanks for sharing
Bonjour Monsieur!
That’s great that I outlined the good side of the company, it seems like it’s in a pretty good position right now. Congrats on initiating the position.
Best regards
DB
Thanks for the analysis. I just bought some TRP earlier last month.
I think the whole KeystoneXL thing is getting so much bad press, everyone is ignoring all the other projects they’ve got going on. And It seems the bad news is already priced into the stock. It’s a good price to get in on the nice dividend, with high growth rates to come in the next few years!
Such a great stock to buy. I bought it when it was around $50 but it dropped further and being traded even more attractive value. Thanks for the analysis!