Is TC Energy (TSX:TRP) a Good Buy in This Volatile Environment?

Given its high-quality earnings, healthy growth prospects, and strong liquidity position, TC Energy would be an excellent buy in this volatile environment.

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Amid the concerns over rising inflation, increasing COVID-19 cases, the expectation of withdrawal of expansionary economic policies, and the liquidity issues at Evergrande Group, a Chinese property giant, the Canadian equity markets have become volatile over the last few weeks. Meanwhile, TC Energy (TSX:TRP)(NYSE:TRP), which operates a highly regulated business, has witnessed robust buying this year, with its stock price increasing by 19.4%. The midstream energy company earns around 95% of its adjusted EBITDA from regulated assets.

Despite the surge in its stock price, TC Energy still trades 2.6% lower than its January 2020 levels. So, let’s examine whether the stock is a good buy in this volatile environment. First, let’s look at its performance in the recently reported second quarter.

TC Energy’s second-quarter performance

TC Energy’s adjusted EBITDA grew 2.1% in the second quarter, while its adjusted EPS increased by 16.3%. The strong performance from its Canadian natural gas pipeline segment, U.S. natural gas pipeline segment, and power and storage segment drove its financials during the quarter. Favourable rate revision boosted the financials of the Canadian and U.S. natural gas pipeline segments. Meanwhile, fewer outage days and an increased contract price drove the financials of the power and storage segment. However, its liquids pipeline segment continued to struggle due to lower volumes on the Keystone Pipeline System.

TC Energy generated net cash flows of $1.7 billion from its operations. It also raised around $750 million, strengthening its balance sheet. At the end of the second quarter, the company had $2.89 billion of cash and cash equivalents. So, the company’s financial position looks healthy.

Growth prospects

The easing of restrictions has improved economic activities, boosting oil demand and its prices. The increased oil demand could drive the throughput of TC Energy’s liquid pipeline segment, while higher oil prices could increase its revenue from marketing and other activities. The company has planned to invest around $21 billion through 2025, expanding its regulated and renewable asset portfolio.

Meanwhile, TC Energy has joined hands with EDP Renewables to construct the 297-megawatt Sharp Hills Wind Farm. It recently signed a 15-year PPA (power-purchase agreement) to sell 100% of the power produced from the facility, which could become operational in 2023. Along with these investments, the recovery in energy demand and its low-risk regulated businesses could boost its financials in the coming quarters. So, TC Energy’s outlook looks healthy.

Dividends and valuation

Thanks to regulated assets and long-term contracts, TC Energy has raised its dividend for the previous 21 years at a CAGR of 7%. Currently, it pays a quarterly dividend of $0.87 per share, with its forward yield standing at 5.63%. Meanwhile, its management is optimistic about its future cash flows and expects to raise its dividends by 5-7% over the next few years.

TC Energy’s valuation looks attractive, with its forward price-to-sales and forward price-to-earnings multiples standing at 4.1 and 14.7, respectively.

Bottom line

Despite the rising volatility, I am bullish on TC Energy, given its steady cash flows, high dividend yield, attractive valuation, and improving energy market. Meanwhile, analysts also look optimistic about the stock. Of the 22 analysts covering TC Energy, 14 have issued a “buy” rating, while the remaining eight have given a “hold” rating. Their consensus price target stands at $69, representing an upside potential of 11.7%.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.

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