3 Reasons to Consider TransCanada Corporation Right Now

Here’s why TransCanada Corporation (TSX:TRP)(NYSE:TRP) looks like a good buy right now.

| More on:
The Motley Fool

TransCanada Corporation (TSX:TRP)(NYSE:TRP) is down 12% this year as the collapse in oil prices and the uncertainty around two major pipelines continue to drive investors away from the stock.

The current issues are definitely cause for concern, but when you look at the big picture, the company has a lot going for it.

Here are the reasons why I think TransCanada deserves a serious look right now.

1. Earnings strength

TransCanada just reported Q2 2015 net income of $429 million, or $0.60 per share, compared with $416 million, or $0.59 per share, in Q2 2014.

The company operates natural gas pipelines, liquids pipelines, and an energy division. All three delivered strong results in the quarter and the consistent numbers are an indication of the quality of TransCanada’s asset base, especially in the current environment.

2. Strong capital program

TransCanada has about $46 billion in projects in the pipeline. Keystone and Energy East are the largest in the portfolio.

Keystone is the controversial US$8 billion pipeline that would send Canadian oil sands production to U.S. refineries. TransCanada has already spent several years and US$2.4 billion trying to get the pipeline approved, and Keystone’s future is still uncertain. At this point, investors should probably consider the project a bonus when evaluating the stock, but Keystone shouldn’t be written off completely.

Energy East is expected to cost at least $12 billion and will transport western Canadian oil to refineries in Quebec and New Brunswick. TransCanada already has binding long-term contracts in place to cover one million barrel per day (Bbl/d) of the 1.1 million Bbl/d of total capacity, and hopes to have the pipeline built and operating by 2020. The company has a lot of work to do to get the various stakeholders on the same page, but I think the project will go ahead.

Keystone and Energy East tend to get a lot of media attention, but TransCanada also has several smaller projects that are moving along nicely. In fact, the company expects to put nearly $12 billion of new assets into service by 2018.

3. Dividend growth

TransCanada has a strong history of dividend growth and the company just announced plans to increase the distribution by 8-10% per year through 2017.

The current annualized distribution of $2.08 per share yields about 4.1%.

Should you buy TransCanada?

The uncertainty around the large projects is probably priced in right now, so there should be limited downside risk to the stock. If Keystone gets approved or if positive news comes out about Energy East, the market could reward TransCanada with a higher valuation than the current 19 times forward earnings.

The dividend is set to grow a healthy clip for the next few years and the distribution should be safe beyond that point. Long-term investors should be comfortable holding the stock at the current price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »