Overall, the year 2023 has mostly been positive for the energy sector in Canada (so far). Even though it hasn’t been a smooth ascent, the energy index is up 20% year to date, following a bull market phase starting from June onward.
However, not all energy companies experience the same bullish growth. Many of Canada’s midstream giants are currency quite discounted, including TC Energy (TSX:TRP).
The company
TC Energy is one of the largest midstream companies in Canada, responsible for transporting one-fourth of the natural gas consumed in the North American continent. It also transports liquids, but that business is not nearly as large, and the company is planning on spinning it off and focusing solely on the natural gas and power-generation business.
This makes it safe, even for a midstream company that mostly relies upon long-term contracts for its revenue, making it relatively immune to short-term energy price fluctuations. The natural gas focus adds another layer of safety because its demand, unlike the demand for oil, is not expected to slack in the long term.
So, TC Energy is a solid pick as a business, and this strength extends to its position as a stock, even in its currently discounted state.
The stock
The stock is currently quite heavily discounted and has lost over a third of its value since its May 2022 peak, and even though the energy sector as a whole is bullish, the TC Energy stock is not showing any signs of turning things around. It’s also quite undervalued right now.
However, its position as a dividend stock is still rock solid. The weakest part of its dividend sustainability is its payout ratio, which is now higher than it has been in the last 10 years, but it may not be reason enough for the company to suspend its dividends or even pause its dividend growth and break its 22-year streak. It’s just three years shy of becoming an Aristocrat in the U.S. as well.
The financials of the company are stable, and the business model itself is the most significant endorsement of the company’s ability to maintain its dividends.
Spinning off the liquids pipeline segment may seem like a move that impacts the company’s revenue stream, but in 2022, about 90% of its revenues came from its natural gas operations. The company is also pursuing multiple organic growth projects and increasing its capacity.
Foolish takeaway
TC Energy is a powerful dividend pick and quite attractive with its current 7.8% yield. However, it may reach an even more attractive level. If the slump continues for a few more months, you can easily lock an above 8% yield before the stock starts turning things around for the better.
So, if you want to play it safe, buy TC Energy now, and if you can afford to keep a close eye on the stock’s movement, buy it just before the energy stock starts a proper recovery.
