A tough 2015
The energy sector really took it on the chin this year, and TransCanada hasn’t been spared.
Part of the stock’s 20% decline is attributed to lower prices in the energy sector, but troubles connected to the company’s large projects have also had an impact.
President Obama rejected TransCanada’s Keystone XL pipeline, putting an end to an expensive multi-year battle to get the project approved. The company hasn’t completely given up hope, but Keystone is likely dead unless the Republicans win the U.S. election in 2016.
In Canada, TransCanada still plans to get its Energy East pipeline built and in service by 2020. The cost has ballooned from $12 billion to nearly $16 billion, and there is still work to be done to get the federal government, provincial governments, and affected municipalities all on the same page. At this point, investors should probably give it a 50-50 weighting when evaluating the stock.
The brighter side of the story
TransCanada has other projects worth $11 billion that are moving along quite nicely; most of the new assets are expected to be in service by 2018.
The company is also developing opportunities in Latin America, including a recent US$500 million contract to build a natural gas pipeline in Mexico. TransCanada already has a strong presence in the country, and the Mexican government has plans to expand its energy infrastructure in the coming years.
On the electricity-generation side of the business, TransCanada just agreed to purchase a gas-fired power plant in Pennsylvania for US$654 million. The 778 megawatt Ironwood plant is a strategic fit for the company, which already has more than 4,500 megawatts of generating capacity in the region.
TransCanada said the asset will immediately add to cash flow and should generate earnings of US$90-110 million per year.
TransCanada pays a quarterly dividend of $0.52 per share that yields about 4.6%. The company is more than capable of covering the distribution, and investors should see the payout rise in step with increases in free cash flow as new assets come online.
Should you buy?
Times are tough in the energy sector, but TransCanada remains a solid long-term investment. Any positive news on Energy East will help support the stock, and a Republican win next fall could pave the way for Keystone to be built.
If you are looking for a dividend pick for 2016 and beyond, TransCanada looks like an attractive option right now.
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Fool contributor Andrew Walker has no position in any stocks mentioned.