Pipeline companies are viewed as more stable investments in the energy sector because they are responsible for transporting and storing oil and natural gas, and are not as sensitive to volatile commodity prices.
From its 52-week high of $63, TransCanada Corporation (TSX:TRP)(NYSE:TRP) has dipped to $52 in a span of nine months, leading to an attractive yield of 4%. That’s a drop of over 17%. Is now an opportunity to buy some TransCanada shares?
Assets and business
TransCanada owns roughly 57,000 km of gas pipelines and 368 billion cubic feet of gas storage. It also owns 12 operating power plants with eight more either partially-owned or in development. TransCanada has the capacity to generate more than 11,800 megawatts of power. Its natural gas pipelines are located in Canada, the United States, and Mexico, while its Keystone crude oil pipeline spans 4,247 km.
In its first-quarter financial results on May 1, TransCanada highlighted its pipeline of $46 billion portfolio of short-term and long-term projects. Compare that number with its existing assets of $64 billion. This indicates that there’s lots of room for the company to grow its earnings and cash flow when its investments start to pay off.
TransCanada’s financial position remains strong; it has a S&P credit rating of A-. At the end of March 2015 its capital structure consisted of 56% of debt and 37% of common equity. It has $1.8 billion cash on hand on top of $5 billion of undrawn credit lines for deployment when needed.
Yield and dividend growth
Although some investors like to buy stable companies at the minimum yield of 4%, historically speaking, a 4% yield for TransCanada is not uncommon. Still, for investors looking to start a position in TransCanada, the 4% yield point is not a bad place to buy some shares.
TransCanada has a 14-year record of increasing dividends every year. In the past, it has typically grown dividends in the 4-5% range. So, it might have surprised investors this year when the dividend was hiked it by 8%. Where did that spike of growth come from?
A healthy dividend must be supported by earnings. TransCanada’s earnings grew 10% quarter over quarter for the first quarter of 2015. If that keeps up, the company should be able to continue growing dividends at an 8-10% rate, given that the company wants to keep the payout ratio around the same level.
TransCanada generally pays out eligible dividends so that Canadian investors are entitled to the enhanced dividend tax credit.
If you’re looking for a stable company with growth, TransCanada maybe the investment you are looking for. At about $52 a share, it pays out a yield of 4% and is expected to grow at least 8% per year. That implies a total return of 12% as long as the earnings grow at the rate of 8%.
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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 has no position in any stocks mentioned.