TransCanada Corporation (TSX:TRP)(NYSE:TRP) is a major energy infrastructure company that is loved by many income investors primarily because of its long-term mission to boost the dividend.
Including this year’s 10.6% increase, the company has hiked the dividend for 17 consecutive years. Through 2020, management wants to boost the dividend by anywhere from 10% to 20% annually.
Thanks to a recent dip in price, the yield crossed 4%, making this stock an immediate buy to me. However, just because the current yield is strong, does that mean management can deliver on future growth?
If TransCanada’s second-quarter earnings show anything, management won’t have a problem. Revenue increased by 16.9% to $3.2 billion with earnings increasing by 80% to $659 million. Year over year, the earnings per share was $0.76 compared to $0.52.
Why is TransCanada doing so well? There are a couple of reasons.
First, the Mexico natural gas pipeline holdings are generating incredibly strong earnings. The company earned $41 million in Q2 2016. In Q2 2017, it earned $120 million. This is thanks to new projects coming online during the year, which create new opportunities to generate income.
Second, TransCanada acquired Columbia Pipeline, which added considerable U.S. natural gas pipelines to its network. Last year, TransCanada earned $188 million. Thanks to the acquisition, TransCanada + Columbia earned $401 million.
This acquisition is pivotal to TransCanada’s success because it adds diversification to the company, which is needed since its pipelines in Canada saw a slight drop in earnings from $342 million to $305 million.
As we saw in Mexico, a big driver of TransCanada’s growth in earnings is new project deployments. Thanks to the Columbia acquisition, TransCanada is now sitting on $24 billion in near-term capital projects.
Additionally, there are $40 billion of medium- to long-term projects that are various stages of design. For example, the Keystone XL pipeline is included. Should these long-term projects come online, the earning growth could continue for over a decade.
Not only are earnings up and projected to continue going up, debt is down. Since the beginning of 2017, TransCanada has reduced its total debt by $7 billion. A big chunk came off thanks to the $4.1 billion sale of its U.S. Northeast power assets. At the end of 2016, the company’s debt-to-equity ratio was 1.47; it is now 1.19. And I see little reason why the debt won’t continue to drop.
Ultimately, the reason I like TransCanada is that it’s a toll-booth business. It charges a flat amount of money for every barrel of oil or gas that goes through its pipeline.
And, just as importantly, 95% of its earnings come from regulated assets and long-term contracts. So fluctuations in the price of natural gas or oil don’t have an immediate impact on the company’s earnings.
So, you’ve got a low-risk and high-predictability business — that’s exactly what you want when it comes to dividends.
If ever the world decides to move away from gas or oil, TransCanada could suffer. But, that world is a long way away. For investors looking for a strong 4% yield that is expected to increase by an average of 10-20% per year through 2020, TransCanada is definitely a smart investment.
