TransCanada Corporation Rises 20%: What Should You Do With it?

In nine months, TransCanada Corporation (TSX:TRP)(NYSE:TRP) has risen 20%. Is it time to buy more or take profit?

| More on:
The Motley Fool

The good thing about investing is that you don’t have to catch the bottom to book solid gains. I bought some shares of TransCanada Corporation (TSX:TRP)(NYSE:TRP) at the $45 level and bought more when it fell to the $42 level, so my average cost basis is about $44 per share. Comparatively, the company’s 52-week low is $40.60 per share, more than 8% lower than my cost basis.

At about $54 per share, TransCanada is about 22% higher from my average cost basis. What should I do with my gains?

My position

Being a value-dividend investor, I’m naturally focused on TransCanada’s dividend; specifically, I want to know if it can continue to increase and if its shares are overpriced.

Thanks to TransCanada’s most recent dividend hike of almost 8.7% that occurred at the start of the year, my yield on cost is almost 5.1%. However, investing is a forward-looking activity. Right now the shares yield almost 4.2%.

As I mentioned before, my shares have appreciated 22%, which is an excellent result for the duration of nine months.

TransCanada’s strength

Since 2000, TransCanada has delivered average annual returns of 13%. This is what happens when you invest in an A-grade, quality company that shares profits with its shareholders via a strong, growing dividend.

From 2000 to now, its dividend has grown at a compound annual growth rate of 7%. More recently, from 2010 to 2015, its dividend grew on average 5% per year.

With $24 billion of near-term projects and over $45 billion of long-term projects, TransCanada expects to grow its dividend at a higher rate of 8-10% per year. If this materializes, TransCanada should trade at a higher multiple than it did in the past.

TransCanada’s dividend is covered by earnings (payout ratio of 88%), distributable cash flow per share (payout ratio of below 50%), and funds generated from operations (below 30%).

Most importantly, TransCanada employs a low-risk business model. More than 90% of its earnings (before interest, tax, depreciation and amortization) come from regulated assets or long-term contracts.

Valuation

For strong dividend growers, the dividend yield is one source that indicates whether the company is priced at a good valuation or not.

Since 2000, TransCanada’s dividend yield has only risen above 4.7% three times. It occurred in 2009 due to the market plummet during the financial crisis and in late 2015 when energy-related stocks plummeted because of low oil prices.

TransCanada’s high yield and low yield range since 2000 has been roughly between the yields of 3.5% and 4.9%, where a strong support in the middle is approximately a yield of 4%.

So, the company is within a fair-value range and is not particularly expensive or cheap.

Conclusion

There are three things I could do: buy, hold, or sell. Technically, TransCanada is overbought, so it’s likely that it’ll either trade sideways or even dip in the near term.

Since I bought at a historically high yield of over 5% and there’s a margin of safety for my original capital as the shares have risen over 20%, I’m likely to continue holding the quality shares for a growing dividend.

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 Kay Ng owns shares of TransCanada.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »