New projects should spur dividends

TransCanada LISTEN:  

TransCanada continues to work on $27.6 billion worth of new pipelines and other projects that it expects to complete in the next four years. In addition, the company will now move ahead with the controversial Keystone XL pipeline; it should cost at least $8.3 billion U.S.

These are big commitments. However, long-term shipping contracts with oil and gas producers helps cut risk for TranCanada’s new projects. The company’s extra cash flow should also let it keep raising its dividend.

TRANSCANADA CORP. $53 (Toronto symbol TRP; Income-Growth Dividend Payer Portfolio, Utilities sector; Shares outstanding: 907.3 million; Market cap: $48.1 billion; Dividend yield: 5.2%; Dividend Sustainability Rating: Highest; operates a 91,500-kilometre pipeline network that pumps natural gas from Alberta to eastern Canada and the U.S. Other operations include 4,800 kilometers of crude oil pipelines and 12 power plants.

  • Founded to 1951 develop the TransCanada Pipeline, which pumps natural gas from Western Canada to Eastern markets
  • Increased the dividend for 18 straight years
  • Paid out 26.9% of its cash flow as dividends in the first half of 2018

Starting with the April 2018 payment, TransCanada raised its quarterly dividend by 10.4%, to $0.69 a share from $0.625. The new annual rate of $2.76 yields a high 5.1%. The company has now increased that rate annually for the past 18 years. It plans to raise its dividend by 8% to 10% annually over the next three years.

In July 2016, TransCanada acquired Texas-based Columbia Pipeline Group for $13.0 billion U.S. Columbia operates natural gas pipelines in the U.S. Northeast, Midwest, Mid-Atlantic and Gulf Coast regions; it also operates underground gas storage terminals.

Thanks partly to those new assets, overall revenue jumped 52.9%, from $8.8 billion in 2013 to $13.4 billion in 2017. Excluding costs related to the Columbia purchase and other unusual items, overall earnings soared 69.8%, from $1.6 billion in 2013 to $2.7 billion in 2017. TransCanada sold new shares to help pay for Columbia. As a result, earnings per share rose at a slower rate of 37.9%, from $2.24 to $3.09.

The company’s earnings in the three months ended June 30, 2018, rose 16.5%, to $768 million from $659 million a year earlier. Due to more shares outstanding, earnings per share gained 13.2%, to $0.86 from $0.76.

However, revenue in the quarter fell 1.1%, to $3.20 billion from $3.23 billion. That’s because the company recently sold its power plants in the northeastern U.S. to help pay for the Columbia purchase. Maintenance shutdowns at its Bruce Power nuclear plants in Ontario also hurt its revenue.

TransCanada says it will start construction in 2019 on the $8.3 billion U.S. ($10.8 billion Cdn.) Keystone XL pipeline project. It will pump crude oil from Alberta to refineries on the U.S. Gulf Coast. The line could begin operating in 2021. In addition, the company continues to look at several longer-term projects that would cost about $13.6 billion.

“Bringing these projects to fruition on time and on budget will drive significant growth in cash flow and earnings that underpin our expected dividend growth rate through 2021.” Russ Girling, CEO

TransCanada had to borrow some of the funds it needed to buy Columbia. As a result, its long-term debt was $38.9 billion as of June 30, 2018. That’s a high 81% of the company’s market cap.

However, high debt is common for regulated utilities. That’s because steady cash flow from their operations gives them flexibility to pay interest costs and upgrade their operations. In fact, over 95% of the company’s cash flow comes from regulated businesses or long-term contracts. TransCanada also held cash of $1.1 billion.

The company’s earnings should improve to $3.50 a share in 2018. The stock trades at 15.1 times that forecast. That’s an attractive p/e in light of TransCanada’s high-quality assets and expansion plans.

TransCanada Corp. is a buy.


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