Should You Buy TransCanada Corporation?

TransCanada Corporation (TSX:TRP)(NYSE:TRP) has enjoyed some big gains this year. Is more upside on the way?

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TransCanada Corporation (TSX:TRP)(NYSE:TRP) is up 35% in 2016, and investors who missed the rally are wondering if there is more upside on the way.

Let’s take a look at the current situation to see if the pipeline giant is an attractive pick right now.

Earnings

TransCanada just report Q2 2016 net income of $365 million, or $0.52 per share. That’s down from $429 million, or $0.60 per share during the same period last year.

On the surface the results don’t look very good, but TransCanada completed planned maintenance on its Bruce Power nuclear plant during the quarter, and that had an impact on the numbers.

With most of the scheduled maintenance shutdowns at Bruce Power now in the rear-view mirror, the company expects to deliver better results in the coming quarters.

Growth

TransCanada recently closed its US$13 billion acquisition of U.S.-based Columbia Pipeline Group. The deal adds valuable infrastructure in the Marcellus and Utica shale gas regions as well as a 5,400 km pipeline system that extends from Appalachia to the Gulf Coast. The Columbia assets combined with TransCanada’s existing network create a 91,000 km natural gas pipeline system.

Strategic acquisitions are important, but TransCanada is also expanding its asset base organically.

The company has $25 billion in near-term projects on the go and continues to add new contracts to the portfolio, including a recent agreement to build a US$2.1 billion pipeline in Mexico.

Investors should also keep their eyes on TransCanada’s mega-projects, namely Keystone XL and Energy East.

President Obama rejected Keystone XL last year, and the project will likely stay shelved if Hillary Clinton wins the coming election. However, a Trump victory could put Keystone back in play.

Here in Canada, TransCanada continues to work its way through the negotiation process on the Energy East pipeline. The pace is slow and more speed bumps should be expected, but TransCanada is making progress, and the project appears to be headed in the right direction.

Dividends

TransCanada pays a quarterly dividend of $0.565 per share for a yield of 3.7%.

As the ongoing capital projects are completed, revenue and cash flow should increase enough to support annual dividend growth of at least 8% through 2020.

Should you buy?

The stock has rallied 50% off the 12-month low, so most of the big upside opportunity is probably priced in at this point.

Having said that, the near-term project backlog is now quite substantial, and there is a good chance that the massive Energy East pipeline will eventually get built.

I wouldn’t expect significant price gains from here, but income investors might want to own the stock for the attractive dividend growth.

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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