TC Energy (TSX:TRP) is a high-yield Canadian dividend stock that could afford to pay investors a 7.7% dividend yield over the next 12 months. The $49.8 billion energy pipelines and power generation large-cap stock has religiously raised its annual dividends every year for 23 consecutive years. Its stellar dividend track record could compel income-oriented investors to add TRP stock to their retirement plan portfolios. However, many investors usually consider dividend yields beyond the 7% mark high-risk and borderline sustainable.
TC Energy stock’s forward dividend yield has marginally grown in 2023 because the stock price has dropped by 10.3% so far this year, and due to a 3.3% dividend raise. Income-oriented investors may find the bloated dividend yield attractive. TC Energy can potentially afford to pay investors a 7.7% dividend over the next few years, even if regular dividend sustainability measures may seem scary.
Going by regular dividend sustainability measures, TC Energy stock’s quarterly dividends comprised 406.6% of the company’s accounting net income in 2022. The company paid out four times its net income to investors last year and 162% of earnings in 2021. How does TC Energy afford to pay the juicy dividend, and continue raising the payout every year?
How TC Energy stock sustains its high-yield dividend
TC Energy’s natural gas pipelines, crude oil pipelines and storage facilities, and power generation plants across North America are capital-intensive, cash-flow-rich assets that may sustain high dividend payouts. We can see that TC Energy can easily afford to pay growing dividends after adjusting for non-cash expenses and amortization charges.
The company uses a cash-based measure to gauge its dividend payment capacity. TC Energy uses Adjusted Funds From Operations (AFFO), a non-standardized accounting measure, to gauge the sustainability of its dividend payouts. The company’s historical AFFO payout ratios for 2022 and 2021 were 49% and 46%, respectively. The dividend looks sustainable.
The AFFO measures the company’s distributable cash flow from operations, adjusted for capital investment requirements, preferred dividends, and debt recapitalizations. It removes the “cloudy” non-cash amortizations, asset impairments, and depreciation charges from operating results to reveal the “true and most likely sustainable” distributable cash flow generation capacity of the business. The company recently projected that its AFFO payout rate could average 50% for the period from 2022 to 2026, and forecasts a respectable 5% compound annual growth rate in AFFO during the period.
Given that TC Energy modelled its three core businesses around long-term contracts with investment-grade-rated customers, and considering ongoing capital investments in natural gas pipelines, the company (or its resultant components post a planned spin-off of the crude oil liquids pipelines business in 2024) could afford to generate stable AFFO growth and pay high-yield dividends to TC Energy stock investors over the next five years.
Investor takeaway
Although TC Energy’s high yield dividend appears sustainable for now, the company has its fair share of risks that dragged TRP stock price lower during the past three years. Higher asset impairments seen in 2022 may be gone. However, growing interest costs and elevated plant operating costs may linger for longer, and they are cash costs. Encouragingly, a planned spin-off and ongoing deleveraging efforts may reduce debt levels, contain interest costs, and enhance free cash flow generation over the next five years. The company could still afford to pay investors a 7.7% dividend yield.
Most noteworthy, a successful reorganization could potentially drive TRP stock higher.
