Is TransCanada Corporation Still a Safe Income Pick?

TransCanada Corporation (TSX:TRP)(NYSE:TRP) has fallen hard this year, but the future isn’t as bleak as the pullback suggests.

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TransCanada Corporation (TSX:TRP)(NYSE:TRP) is down 25% since the start of the year, and investors are wondering if the pullback is an opportunity to buy or a signal to avoid the name.

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

Big projects

TransCanada can’t seem to catch a break. The rout in the oil market has driven investors out of anything connected to the energy space, and President Obama just rejected the company’s Keystone XL pipeline.

Where will future growth come from?

Keystone is certainly on the shelf for the near term, and a win by the Democrats next year would likely keep it there for even longer.

TransCanada’s other major project is Energy East, a $12 billion pipeline designed to carry western Canadian crude oil to refineries in eastern Canada. That initiative has also run into political headwinds, and it is too early to tell if the new Trudeau government will have the desire or the ability to get the various provincial and local stakeholders on board to get the pipeline built.

For the moment, TransCanada is still aiming for a 2020 in-service date for Energy East.

Other developments

TransCanada is not completely reliant on the two mammoth pipeline projects for its future growth. In fact, the company has about $11 billion in small- to medium-sized projects under development that will be completed and in service by 2018.

In addition, TransCanada recently announced a number of new contracts and investments.

The company has been chosen to build a US$500 million natural gas pipeline in Mexico. TransCanada has a strong foothold in the country and plans to pursue further opportunities. By 2018, the company will have US$3 billion invested in five Mexican pipelines.

In Canada, the company just signed contracts for 2.7 billion cubic feet per day (Bcf/d) of natural gas transportation services that will require the construction of a $570 million system in 2018. The new infrastructure is an expansion on the NGTL System located in the rapidly growing natural gas play in northwestern Alberta and northeastern British Columbia.

South of the border, TransCanada recently spent US$654 million to acquire a strategically located natural gas-fired power plant.

Earnings

TransCanada reported Q3 2015 net income of $402 million, or $0.57 per share, down from $457 million, or $0.64 per share, in the same period last year. A drop in profits is never good, but the company is doing well in a challenging environment.

Dividend growth

TransCanada pays a quarterly dividend of $0.52 per share that yields about 4.9%. The company expects to increase the payout as new infrastructure goes into service and as cash flow increases.

Should you buy?

TransCanada remains a solid income pick and the stock is now trading at an attractive 16 times forward earnings. Dividend investors with a buy-and-hold strategy should use the pullback as an opportunity to add the shares to their portfolios.

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.

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