An Awesome Dividend Stock Priced at a Bargain

Here’s why TransCanada Corporation (TSX:TRP)(NYSE:TRP) may be a great buy today.

Kay Ng

Author Bio Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt. Education Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting Areas of Expertise Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies. Social Media Profiles LinkedIn Favorite Investment Quotes “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published April 15, 2018 10:00 am EDT

TransCanada Corporation (TSX: TRP)(NYSE: TRP) stock has shaved off ~16% in the last 12 months. So, how does that make it an awesome stock to consider? Well, the A-grade energy infrastructure company is now cheaper and offers a juicier dividend yield.

Is there really a buying opportunity in TransCanada right now?

At ~$53.20 per share, TransCanada trades at a price-to-earnings ratio (P/E) of ~17, while its long-term normal P/E is ~20, and its five-year normal P/E is ~21.7. Last year, the company increased its earnings per share by ~11%.

For the next three to five years, analysts estimate that TransCanada will grow its earnings per share by at least 7.3% per year.

TransCanada has been awarded an S&P credit rating of A-, so one might argue that the company should be worth a premium multiple. At worst, the stock is fairly valued.

However, the analyst consensus from Thomson Reuters thinks the dividend aristocrat is actually severely undervalued. It has a mean 12-month target of $69.30 per share on the stock, which represents an impressive upside potential of ~30%.

Is TransCanada’s dividend safe?

At the recent quotation, TransCanada offers a dividend yield of almost 5.2%, which is at the high end of its 10-year yield range. The payout ratio is estimated to be ~85% based on its adjusted earnings per share and ~62% based on its cash flow.

Both payout ratios are a little higher than they have been in the past few years, but not excessively so. Therefore, TransCanada’s dividend should be intact.

Moreover, TransCanada’s dividend-growth history is 17 years strong. Management last hiked the dividend by 10.4% in the first quarter. Through 2021, management aims to increase the company’s dividend by 8-10% per year.

How is TransCanada growing?

TransCanada has $23 billion of near-term growth projects and +$20 billion of medium- to long-term projects, which should add to the growth that’s experienced by its existing operations.

Investor takeaway

TransCanada is an A-grade company that employs a low-risk business model, which generates ~95% of its earnings before interest, taxes, depreciation, and amortization from regulated assets or long-term contracts. Thus, its operations generate stable cash flow.

Coupled with a sustainable payout ratio and a $43 billion capital plan to boost its growth, the company’s dividend should be intact. TransCanada offers a ~5.2% yield and should be able to grow its dividend by 8-10% per year through 2021.

Furthermore, the stock is currently attractively priced with analysts estimating upside of ~30% in the next 12 months. Altogether, the stock has ~35% total returns potential in the near term.