TC Energy (TSX:TRP) is a major player in the North American energy infrastructure industry. The share price has dropped considerably over the past year, and investors who missed the rally off the 2020 market crash are wondering if TRP stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income or a Registered Retirement Savings Plan (RRSP) targeting total returns.
TC Energy overview
TC Energy is primarily focused on natural gas transmission, but it also has oil pipelines and power-generation facilities.
The company operates 93,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity located in Canada, the United States, and Mexico. TC Energy is nearing completion of its 670 km CoastalGasLink pipeline that will bring natural gas from Canadian producers to a new liquified natural gas facility being built on the coast of British Columbia.
Pandemic delays, soaring material and labour costs, bad weather, and disputes with contractors have all combined to make Coastal GasLink more expensive than planned. In fact, the total cost is expected to be at least $14.5 billion, which is more than double the original budget. This is one reason the share price is down so much over the past year. At the time of writing, TRP stock trades near $49 per share compared to more than $70 at the peak in 2022.
Soaring interest rates are the other reason for the decline in the stock price. Higher borrowing costs make debt more expensive. This can reduce profits and eat into cash flow available for distributions to shareholders. TC Energy uses debt as part of its funding strategy for its capital initiatives.
Management is making moves to shore up the balance sheet. TC Energy sold a stake in some U.S. assets in recent months to raise $5.2 billion. The company also intends to spin off the oil pipelines business and is evaluating the potential monetization of assets in Canada to build up the capital position.
Despite the near-term headwinds, management still expects the overall $34 billion capital program to generate enough cash flow to support ongoing yearly dividend increases in the 3-5% range. TC Energy has increased the distribution annually for more than 20 years. At the current share price, TRP stock provides a 7.6% dividend yield.
Should you buy TRP stock now?
Ongoing volatility should be expected until there is clarity on the endpoint for interest rate increases in Canada and the United States. Big investors might also stay on the sidelines until Coastal GasLink is finished and the final costs are known.
Despite the near-term uncertainty, the stock is likely already oversold. Investors who buy near the current price can pick up a great dividend yield that pays you well to ride out any additional turbulence. Economists are calling for rates to peak in the coming months and are starting to predict rate cuts in 2024. As soon as the central banks signal they are done raising rates, there could be a meaningful rebound in top dividend stocks as yield seekers transition out of fixed-income holdings.
If you have a contrarian investing style for a self-directed TFSA or RRSP, TC Energy deserves to be on your radar.