The share price of TC Energy (TSX:TRP) took a beating over the past year amid a general pullback in the TSX energy infrastructure sector and as a result of some internal challenges on a major project.
Contrarian investors seeking high-yield passive income and a shot at decent capital gains are wondering if TRP stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
TC Energy overview
TC Energy is a major player in the natural gas transmission segment of the North American energy infrastructure industry with 93,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage located in Canada, the United States, and Mexico. The company also has oil pipelines and power generation facilities that round out the revenue stream.
Management recently announced plans to spin off the oil pipelines business into a separate entity. The move will enable TC Energy to raise funds to finance the ongoing $34 billion capital program. Unloading the oil pipelines could also help TC Energy attract institutional investors with ESG (environmental, social, and governance) mandates.
The decision to hive off the oil infrastructure group follows a recent sale of part of the company’s U.S. assets for $5.2 billion. TC Energy had to shore up the balance sheet after the budget for the 671 km Coastal GasLink pipeline, now 91% complete, ballooned from about $6 billion to the current estimate of $14.5 billion.
TC Energy stock trades near $48 at the time of writing compared to more than $73 at the peak last year.
The pullback is probably overdone at this point, considering the worst of the Coastal GasLink issues should be in the rearview mirror, and management still expects the capital program to deliver solid revenue and cash flow growth in the coming years.
TC Energy has increased the dividend annually for more than two decades. Current guidance is for yearly hikes of 3-5% as new assets go into service and cash flow grows. At the time of writing, the stock provides a 7.7% dividend yield.
Is TC Energy a good stock pick?
Ongoing volatility should be expected, and additional downside is possible if interest rates continue to increase. That being said, the current dividend should be safe, at the very least, so investors seeking passive income should consider buying TRP stock at this level.
There is solid upside opportunity for the stock over the long term. Investors looking for attractive total returns might consider starting a position at the current price and plan to add more shares if further downside materializes. TRP stock already looks cheap, and it wouldn’t be a surprise to see TC Energy become a takeover target if the share price extends the recent drop.