Stock markets rallied over the past several months, but some top Canadian dividend stocks are now down considerably from recent levels. Contrarian investors seeking high dividend yields and a shot at decent capital gains are wondering which TSX dividend-growth stocks are now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
TC Energy
TC Energy (TSX:TRP) trades near $49 at the time of writing compared to $55 about a month ago and $74 at the peak in 2022. The stock was around $45 last fall before catching a nice tailwind but has recently given up a good chunk of the gains.
What is causing the stock price to move?
Interest hikes in Canada and the United States led to the pullback in the share price from the middle of 2022 to October last year. TC Energy uses debt to fund part of its growth program. High borrowing costs cut into profits.
The U.S. Federal Reserve and the Bank of Canada increased interest rates aggressively to try to get inflation down from more than 8% to the 2% target. Inflation in Canada came in at 2.9% in March 2024 and at 3.4% in the United States, so more work needs to be done, but the rate hikes appear to be working and should continue to slow consumption and ease wage growth.
The rally in the stock from October last year to the beginning of April came as a result of investors betting that the central banks will start cutting rates in the second half of 2024 to avoid driving the economy into a recession.
Over the past few weeks, however, the party ended as investors started to realize high inflation could be persistent through the rest of the year. In that scenario, the central banks might need to keep interest rates elevated until 2025.
TC Energy’s dividend
The board raised the dividend by 3.2% for 2024. TC Energy has given investors a raise annually for more than 20 consecutive years. Management expects the business to generate adequate cash flow expansion to support planned dividend increases of 3-5% per year over the medium term, even in the current high-rate environment.
At the current share price, investors can get a dividend yield of 7.8%.
The overall business performed well in 2023. Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 11% from 2022. On a per-share basis, comparable earnings rose by 5%. TC Energy finally completed its $14.5 billion Coastal GasLink pipeline last year. The project’s budget more than doubled from the original estimates, which is another reason the stock fell out of favour with investors.
The unexpected expenses put pressure on the balance sheet and this forced TC Energy to monetize $5.3 billion in assets last year. Another $3 billion in asset sales is expected in 2024, along with the spinoff of the oil pipeline operations. Coastal GasLink is scheduled to begin moving natural gas from producers to a new liquified natural gas (LNG) facility in British Columbia in 2025.
With Coastal GasLink out of the way, TC Energy continues to make progress on the rest of the growth program, with about $8 billion of development spending anticipated in 2024.
The bottom line on TC Energy stock
Investors could see additional downside in the near term if inflation does not continue to decline and the central banks indicate they will hold rates higher for longer. That being said, TRP stock already looks undervalued, and you get paid well enough to ride out any additional turbulence.
If you are a patient investor looking for a high-yield dividend-growth pick, this stock deserves to be on your radar.
