TC Energy (TSX: TRP) soared over the past three years, but has given back some of the gains in the past two months. Investors who missed the rally 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 dividends and long-term capital gains.
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TC Energy share price
TRP trades below $85 per share at the time of writing, compared to the 12-month high of $100 that capped a stellar three-year run from $45.
The recent pullback is primarily due to a sharp increase in yields in U.S. and Canadian government bonds, triggered by concerns that high oil prices are going to accelerate inflation and force the American and Canadian central banks to raise interest rates over the next few years. The market is already expecting the U.S. Federal Reserve to increase rates on September 16.
TC Energy uses debt to help cover the cost of building major energy infrastructure projects that can be worth billions of dollars and often take years to complete. The jump in debt expenses caused by rising rates is a headwind for pipeline companies and utilities. Elevated debt expenses reduce profits and can cut into the amount of cash that is available to pay down debt or boost dividends. A big jump in financing costs can also make some projects less attractive, forcing companies to delay or abandon developments. This can slow down growth, which puts more pressure on the earnings multiple that investors are willing to pay for a stock.
Investors can look back to 2022 and 2023 to get a sense of the potential impact on the share price when rate hikes are aggressive over a short period of time. TC Energy’s share price fell from $74 in 2022 to $45 in 2023 during the last stretch of rate increases by the U.S. Federal Reserve and the Bank of Canada. The subsequent rebound in the stock started around the time the central banks indicated they were finished raising rates. Interest rate cuts in 2024 and 2025 helped fuel the surge to a new high this year.
This time, the rate hikes shouldn’t be as big or arrive as quickly in succession. Inflation is sticky, but it is much lower than it was in 2022.
Upside
TC Energy continues to expand its natural gas and power generation asset base. The company is investing roughly $6 billion per year on projects over the medium term. This should support steady dividend growth. TC Energy raised the dividend in each of the past 26 years.
A series of new major developments could also be on the way. TC Energy is evaluating plans to double capacity on its new Coastal GasLink pipeline that carries natural gas from Canadian producers to the new LNG Canada export facility, which itself is looking at moving ahead with a major expansion.
TC Energy is also part of discussions to potentially build a new natural gas pipeline to move natural gas from Canadian producers to Churchill, Manitoba where it would connect with a new LNG export site.
TC Energy’s existing natural gas pipeline and storage network already carries roughly 30% of the natural gas used in North America. The construction of new gas-fired power generation facilities in the United States, Canada, and Mexico will also boost demand for the fuel.
The bottom line
Near-term volatility should be expected as the market tries to figure out how high interest rates will go in the next year. As such, investors might want to start with a half position at this point.
The long-term prospects should be solid. TRP provides a good dividend that should continue to grow, and the current 4% yield pays investors well to ride out any additional downside. Further weakness in the stock would be an opportunity to add to the position for a buy-and-hold portfolio.
