TC Energy (TSX:TRP) has long been a favourite among Canadian dividend investors for its impressive yield. Yet lately, cracks have started to appear in its financial foundation. In contrast, Royal Bank of Canada (TSX:RY) continues to shine as a beacon of stability and growth. Offering a safer haven for those looking for reliable long-term investments. While TRP’s high dividend might catch your eye, RY’s comprehensive strength makes it the better choice right now.
The dividend
TRP’s dividend yield of 4.80% certainly stands out, but investors should dig deeper before jumping in. The dividend stock’s payout ratio of 77.60% raises red flags. This means TRP allocates most of its earnings to dividends. Leaving little room to reinvest in the business or buffer against economic downturns. Compounding this issue is the company’s staggering debt-to-equity ratio of 178.88%. This points to heavy reliance on borrowed money. In a high-interest-rate environment, this level of leverage could lead to significant financial strain.
RY offers a far more balanced picture. Its dividend yield of 3.23% might not be as high as TRP’s. Yet it is underpinned by a payout ratio of just 48.98%, leaving plenty of room for reinvestment and growth. Moreover, RY’s financial health is impeccable, with a trailing price-to-earnings (P/E) ratio of 15.57 and a forward P/E of 13.66. Thus signalling that it is not only profitable but also reasonably valued compared to its peers.
Into earnings
Recent earnings further highlight the divergence between these two companies. For the third quarter (Q3) of 2024, TRP posted a modest revenue growth of 3.60% year over year, with quarterly earnings growth not even registering. This performance underscores its struggle to generate meaningful growth in a challenging operating environment. RY, in stark contrast, delivered a robust 13% revenue growth and an impressive 16.20% increase in quarterly earnings. This steady performance reflects RY’s ability to navigate headwinds effectively; it’s supported by diversified revenue streams and a strong operational base.
TRP’s cash flow challenges are another significant concern. While its operating cash flow of $7.47 billion might look decent at first glance, the dividend stock is running a negative levered free cash flow. This means that it is spending more than it generates after meeting its financial obligations and capital expenditures. This shortfall suggests that TRP may struggle to fund future growth without further increasing its debt. RY, however, is in a league of its own with $732.14 billion in total cash, providing an enormous cushion to weather economic volatility or seize growth opportunities.
Historically, TRP’s performance has been inconsistent, with its 52-week range showcasing significant volatility. Its current price is near its year-high, which might limit further upside potential. In contrast, RY has steadily climbed, with a 52-week high of $179.86, currently trading close to this peak, reflecting consistent investor confidence.
Future outlook
Looking ahead, TRP faces mounting uncertainties. Cost overruns on major projects and regulatory hurdles could weigh heavily on its future earnings and balance sheet. The energy sector itself is also subject to increasing scrutiny and volatility, adding another layer of risk. On the flip side, RY has a positive outlook, driven by technological investments, international expansion, and a focus on diversified banking services. Its consistent return on equity (ROE) of 13.68% shows efficient management. And its robust fundamentals ensure it is well-positioned for growth.
When it comes to dividends, TRP’s high yield is tempting, but its sustainability is under question. Investors should consider whether the company can maintain such payouts given its limited financial flexibility and heavy debt burden. Meanwhile, RY has a long history of dividend growth, reflecting its commitment to returning value to shareholders in a sustainable manner. With a lower payout ratio, RY is far less likely to cut dividends even during challenging times.
Bottom line
While TRP might seem attractive for its high yield, it comes with considerable risks. Its financial challenges, mounting debt, and modest growth prospects make it a risky bet, particularly in the current economic environment. RY, by contrast, offers a dependable mix of stability, growth, and dividends. For investors seeking long-term value, RY is the clear winner. A blue-chip stock that rewards patience and provides peace of mind in uncertain times.
