TC Energy (TSX: TRP) is up 40% in the past year. Investors who missed the rally are wondering if TRP stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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TC Energy stock
TC Energy trades near $68.50 at the time of writing. The stock bounced in recent days but is still off the 12-month high around $71 and remains below the $74 the stock fetched in June 2022 before going into an extended decline that saw the share price dip as low as $45 in late 2023.
The rebound through 2024 coincided with rate cuts by the Bank of Canada and the U.S. Federal Reserve. TC Energy and other pipeline stocks are sensitive to changes in interest rates because they use significant debt to fund capital projects that cost billions of dollars and can take years to complete. For example, TC Energy’s 670km Coastal GasLink pipeline received the green light in 2018 but didn’t reach mechanical completion until late 2023 and is expected to go into commercial operation in 2025. The budget for that project more than doubled to roughly $14.5 billion. TC Energy had to take on extra debt to get the pipeline completed. That is another reason the stock fell out of favour in 2022 and 2023.
Management has done a good job of monetizing non-core assets to reduce the debt load. The company sold interests in some American assets and spun off its oil pipelines business. Falling interest rates help reduce borrowing expenses.
Outlook
TC Energy expects $8.5 billion of projects to go into service in 2025. The ongoing development program over the medium term is expected to be about $6 billion per year. TC Energy raised the dividend by 3.3% for 2025. This is the 25th consecutive annual dividend increase. Investors who buy the stock at the current level can get a dividend yield of 5%.
TC Energy is now primarily focused on natural gas transmission and storage and power generation. Demand for natural gas is expected to increase in the coming years as new gas-fired power facilities are built to provide electricity for artificial intelligence data centres. This should benefit TC Energy as it owns strategic pipeline infrastructure in Canada and the United States to move natural gas from producers to utilities.
Risks
The Bank of Canada and the U.S. Federal Reserve both put rate cuts on hold in their latest rate decisions as they try to assess the inflationary impact of tariffs. They are also watching the effect on the economy. If inflation surges, the central banks could be forced to hold rates in place or even raise them, even amid a weakening economy. In that scenario, TC Energy and other pipeline stocks could face new pressure.
Time to buy TC Energy?
The easy money has likely already been made, but income investors can still get a good yield on the stock and dividend growth should continue. If you have some cash to put to work, TC Energy deserves to be on your radar for a portfolio focused on high-yield stocks.
