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TransCanada Corporation: Should Dividend Investors Buy the Pullback?

TransCanada Corporation (TSX:TRP)(NYSE:TRP) has given up some of its 2016 gains in recent weeks, and investors are wondering if this is a good opportunity to buy the stock.

Let’s take a look at the current situation to see if the pipeline operator deserves to be in your portfolio.

Trump effect

TransCanada took a big hit in 2015 when President Obama rejected the company’s Keystone XL pipeline–an US$8 billion project that would carry 800,000 barrels of oil per day from Alberta to the United States.

Under a Clinton administration, the project would likely have stayed shelved, but the surprise Trump win offers some hope for TransCanada and its investors that Keystone could be back on the table in the near term.

Last May Trump told reporters at a press conference in North Dakota that he would “absolutely approve it (Keystone), 100%,” but he would want a better deal.

Senate majority leader Mitch McConnell is already pushing for Keystone to be a top priority for the Trump administration.

Alberta’s oil producers want to sell to global markets, but that requires access to the coast. Keystone is one of the projects that would make this possible.

It is unclear what Trump plans to demand in return for his approval, but any progress on Keystone should be positive for TransCanada’s stock.

What about Energy East?

TransCanada’s other major pipeline proposal, Energy East, would carry crude from Alberta to refineries in eastern Canada. This $15.7 billion project is stuck in the mud, as federal, provincial, and local governments continue to negotiate terms. Energy East also suffered a significant setback in September when National Energy Board (NEB) panelists in charge of reviewing the project stepped down amid claims they might be biased.

The pipeline would carry 1.1 million barrels of oil per day.

Growth through acquisitions

TransCanada recently purchased Columbia Pipeline Group for US$13 billion. The deal adds strategic natural gas assets as well as a strong backlog of commercially secured projects to complement TransCanada’s existing portfolio of medium-sized organic developments.

In fact, TransCanada expects to complete about $25 billion in new infrastructure over the next four to five years. As these assets go into service, cash flow should increase enough to support annual dividend growth of at least 8% through 2020.

Should you buy?

Dividend investors with a buy-and-hold strategy should consider adding TransCanada to their portfolios. The stock already offers a safe 3.9% yield with decent growth projected over the medium term.

Keystone XL and Energy East remain up in the air at this point, but I think at least one of the projects will eventually go ahead, and that would support stronger dividend growth over the long term.

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