Between rising interest rates, inflation, the war in Ukraine, supply chain disruptions and the continuing effects of the pandemic, stock market investors have many things to worry about.
Wouldn’t it be nice if there was a company you could count on to provide predictable profits and dividends, no matter what else happens in the world?
Well, it turns out there is.
TC Energy Corp. (TRP) – former TransCanada Corp. – may be just the antidote that investors need to deal with the current global turmoil. That’s why:
Recession-proof, low-risk business model
We all want the world to give up fossil fuels as soon as possible, but the reality is that the transition to clean energy will take many years. Meanwhile, people will still need natural gas to heat their homes and businesses, generate electricity and keep the industry running. Calgary-based TC Energy derives more than three-quarters of its pre-interest, tax, depreciation and amortization profits from natural gas pipelines in Canada, the United States and Mexico, with the remainder coming from liquid and electricity production and storage pipelines. Moreover, about 95% of TC Energy’s EBITDA comes from operations that are either regulated or sold under long-term contracts, which contributes to the stability of profits.
Many opportunities for growth
Although the Keystone XL Pipeline project is dead, TC Energy is still making a lot of progress. Of the company’s $ 25 billion capital expenditure program, most is for pipeline projects. Natural gas is expected to play a growing role in the transition to a lower carbon future, displacing dirtier coal in electricity generation and providing a reliable reserve of periodic energy from wind and solar. The war in Ukraine has only underscored the importance of secure natural gas supplies, as sanctions against Russia have led to supply disruptions, higher prices and growing European demand for liquefied natural gas (LNG) from North America. This has contributed to “improving sentiment around natural gas as a fuel in transition, which in turn should help develop North America’s natural gas reserves and infrastructure,” Matthew Weeks, an analyst at iA Capital Markets, said in a recent note.
Contribution to the energy transition
At the same time, TC Energy is investing in its Bruce Power nuclear production assets (nuclear energy is seen by many as crucial to achieving greenhouse gas reduction targets) and other decarbonisation initiatives. These include the replacement of traditional gas-fired compressor units with electric motors and, in the long term, the pursuit of hydrogen production and carbon capture and storage projects.
A well-protected – and growing – dividend
With the growth of stock markets over the past few years, it has become increasingly difficult to find companies with juicy dividend incomes. But as TC Energy shares lag behind the market, it still gives about 5 percent. You can’t get this with a bank or utility. Moreover, TC Energy has been raising its dividend for 22 consecutive years and plans to continue increasing it by about 3% to 5% per year, supported by growing profits and cash flow. Of course, this is lower than the growth of dividends in previous years, but it is in line with the company’s goal to have a conservative payout ratio – currently about 50% of the distributed cash flow – and to reinvest more of its cash funds internally to finance growth.
Reasonable assessment
TC Energy is a utility-like business, but without a utility-like assessment. As stocks have been hampered by uncertainty about the future of fossil fuels, stocks are now trading at a 21% discount on profit-based prices compared to regulated utilities, Robert Quan, an analyst at RBC Dominion Securities, said in a recent note. With a recent P / E of about 16 times the calculated profit for 2022, the shares are trading towards the lower end of their historical valuation range. “We believe that as the market focuses more on energy security, as well as on the company’s energy transition opportunities (both in the short and long term), there is the potential to expand the assessment many times over,” said Mr Kwan.
Concluding remarks
TC Energy will not make you rich overnight. The average 12-month target price of the 22 analysts following the company was $ 72.50, just slightly ahead of Friday’s closing price of $ 71.43. However, if you are looking for a reliable and growing income, with the likelihood of modest capital gains in the long run, it may be worth taking a closer look. Remember to stay diversified and be sure to do your own due diligence before investing in any security.
Full disclosure: The author owns shares in TRP.
Send your questions by email jheinzl@globeandmail.com. I can’t reply to emails in person, but I choose certain questions to answer in my column.
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