TC Energy (TSX: TRP) recently gave back some of its gains after a massive rally that saw the stock price double in the past three years. Investors who missed the rebound are wondering if TRP stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividend income and long-term total returns.
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TC Energy share price
TC Energy trades near $86 per share at the time of writing compared to $100 last month. The stock is still up 20% in the past year, but the dip is providing an interesting potential entry point for dividend investors.
TC Energy last took a big hit in 2022 and 2023 when the Bank of Canada and the U.S. Federal Reserve aggressively increased interest rates to get inflation under control. The sharp spike in rates over such a short period of time drove up borrowing costs for companies like TC Energy that use debt to fund part of their large capital programs. In TC Energy’s case, the timing wasn’t great, as it had to take on extra debt to complete its Coastal GasLink pipeline that had gone way over budget. TC Energy’s share price slid from $74 to $45 over the course of about a year, before starting its rebound.
Since then, management has done a good job of monetizing non-core assets to reduce debt. Coastal GasLink is now complete and moving natural gas from Canadian producers to the new LNG Canada liquified natural gas export facility. TC Energy is even evaluating a plan to double Coastal GasLink’s capacity amid strong LNG demand from international buyers.
The company also completed a large natural gas pipeline in Mexico last year. The 715 km Southeast Gateway project came in 13% below budget and on time and is now in commercial operation.
Ongoing capital investments are slated to be about $6 billion per year over the medium term. This should drive steady growth in cash flow to support dividend increases as the new assets are completed and go into service. TC Energy raised the dividend in each of the past 26 years. At the time of writing, the stock provides a dividend yield of more than 4%.
Risks
Sticky inflation could force the central banks to start raising interest rates again later this year or in 2027. Rising bond yields in recent months are signalling expectations that this will occur. Rate increases in Canada and the United States won’t likely be as large as in 2022 and 2023 and will probably be more spread out, but they would still be a headwind for the pipeline industry.
Opportunity
Canada wants to become an energy superpower. This could lead to new oil and natural gas pipelines being built to move Canadian energy to more global buyers, as well as increasing exports to the United States. TC Energy would be a good candidate to participate in the construction of any new major natural gas pipeline projects, given its expertise in the segment.
South of the border, the company’s existing natural gas transmission network is strategically positioned to benefit from the construction of new gas-fired power generation facilities that are being built to supply electricity to AI data centres.
The bottom line
Near-term volatility should be expected, but buy-and-hold dividend investors might want start nibbling on TC Energy at this level and look to add to the position on any additional weakness. As a long-term dividend pick, this stock deserves to be on your radar.
