Looking at the yield a company is paying can often be a good indication of how the market is viewing that particular investment. And with the yield at nearly 5%, it’s clear that TransCanada Corporation (TSX: TRP)(NYSE: TRP) has experienced better days.
But that’s not all that surprising; TransCanada has given up 11.5% since mid-November.
Part of the problem is that TransCanada gives investors mixed signals. One quarter, the company had a mixed bag of good and bad news. The next quarter saw the company perform quite well, with management announcing a 10.4% boost to the dividend.
The fourth-quarter results were quite impressive. The company earned $861 million in profits compared to a $358 million loss a year prior in the fourth quarter. And full year, the company earned $2.997 billion compared to only $124 million in the prior year. All in all, the business is doing quite well.
That said, should you believe that the company is suffering or that the company is doing well?
This goes back to something I’ve often said about TransCanada: ignore the quarterly results. All in all, the business is in a very good position, but from time to time, the company may not execute perfectly. Or analysts might have unrealistic expectations, which happens with a lot of companies.
Instead, I would focus your energy on two key factors …
First, the growth prospects for the company are significant. In the near term, there is $22.7 billion in projects that are expected to come online in the next few years. When all is said and done, the expected carrying value will be $8.1 billion. Thus, I fully expect these projects to contribute to cash flow.
And long term, there is $23.9 billion in projects that, should they come online, could have a huge impact on the business. Nevertheless, management doesn’t know when they would come online and how much they would cost. So, we don’t focus on these as much.
Second, management is incredibly shareholder friendly. As long as the business can generate cash flow to support the dividend, TransCanada will continue rewarding investors. Management is looking to boost the yield by 8% every year, so when the 10.4% increased was announced, I was quite pleased.
Ultimately, TransCanada is a solid company in a solid position. It might experience some turbulence, especially around the quarter, but that creates an opportunity to buy. At just shy of a 5% yield, I see little reason not to own this stock. And if you’re planning to hold for a long time, the reward with regard to dividends could prove significant.
