TransCanada Corp – A strong investment for income seekers

TRP - TransCanada PipelineEnergy is a necessity. Our need for energy will not go away anytime soon. In fact, we now strive to use cleaner energy whenever possible and many of the energy companies are upping their game towards generating and providing cleaner energy where possible as well as providing safer transportation.

TRP Business Summary

TransCanada Corporation (TSE:TRP, NYSE:TRP) is an energy infrastructure company. For more than 65 years, TransCanada has operated pipelines, storage facilities and power-generation plants that support life in Canada, the U.S., and Mexico.

With $89B in assets, TransCanada Corporation strive to provide shareholders with value. Since 2000, TRP has delivered 14% average annual return to the shareholders. The return on invested for shareholders is generated through three business segments.

TransCanada’s business covers natural gas pipelines, oil & liquid pipelines as well as power generation.

TRP - Operations
Source: web site investor relations

By The Numbers

TRP Revenue

TRP - Growth Prospect
Source: TransCanada Corporate Profile

As with any major companies, looking ahead and planning is expected to ensure growth and sustainability.

As you can see, based on the projects and acquisitions, TransCanada Corporation is expected to have a compound annual growth rate of 10% in earnings and this is why the company can expect to grow its dividend at the same rate.

Now that we know the company has strong plans for growth, lets look at the past to understand the ability for TRP to execute.

Unfortunately, looking at EPS (seen below) alone is not going to help you as the GAAP reporting is showing very inconsistent revenue compared with the revenue generated from operations. By all means, it doesn’t mean you ignore it but you now have to dig deeper to assess where the money is going. In the financial highlights table below you can see the non-GAAP numbers which establishes a growth pattern in earnings but also in capital spending and acquisition.

TRP - Financials
Source: TRP Investor Fact Sheet

One key point to understand is that capital spending and acquisitions are usually done with the expectations to grow the top and bottom line but it doesn’t usually happen in the same year. There is an investment period and the growth is expected to come at a later time.

Time and trust in the management will tell if the accelerated spending will lead to the expected top and bottom line growth. The fact that the company chooses to advertise future dividend growth in the range of 8% to 10% establishes a line in the sand to measure their progress.

One of the major project for TransCanada Corporation is the Keystone Pipeline which is under a lot of scrutiny by governments and environmentalists. On March 24, the US government issue a permit for the project allowing the project to move forward. Due to ever changing regulations and environmental challenges, the approval to move forward is not a definitive win until the project is completed and operational. The company may accelerate spending to leverage the current window of approvals. To learn more about the project itself, see the Keystone Pipeline website.

TRP Dividend Summary

TRP is a Canadian Dividend Aristocrats and a Dividend Achiever amongst 33 Canadian stocks getting the honor of having more than 10 years of dividend growth. With an expected annual dividend growth at the upper end of 8 to 10% range, TRP may reach the 10% CAGR dividend growth club at some point in the future. It has some work to do but the growth trend is there. See below for its 3, 5 and 10 year averages.

  • 3 year average of 7.09%
  • 5 year average of 6.11%
  • 10 year average of 5.85%
TRP - Financials
Source: TRP Investor Fact Sheet

While the dividend growth is in control with higher expected revenue growth, the revenue took a beating back in 2015 and it had a huge impact on the dividend payout ratio. It doesn’t mean the company is in trouble as we now need to look at other data points.

  • 3 year average of 295.06%
  • 5 year average of 211.38%
  • 10 year average of 141.15%

GAAP reporting is the consistent approach to ensure apples to apples are compared which is where the negative earnings shows up. However, the company is also showing the comparable EPS as a way to show how they believe their reporting would have shown their earnings. Funds generate from operations becomes important to assess the growth in revenue to cover the dividend and as you can see from their financial data, it has been growing annually.

TRP - EPS vs Dividends
Source: Data from Financial Reports

Investment Philosophy #1: BUSINESS QUALITY

As I mentioned in the opening paragraph, there is a need for energy to heat our homes, move around and to create products we use daily. There is also a need to distribute the energy and that’s where TransCanada Corporation comes in with its vast pipeline across North America. Regardless of how the energy is generated, reaching customers will always be needed and it makes the transportation of energy a necessity and TRP (along with ENB) operate in a somewhat oligopoly. Their business model has very little chances of being disrupted.

If you had invested $1,000 ten years ago, it would be worth $2,095 and you would have had a 7.92% CAGR rate of return. I consider it a great investment if it can perform above 10%.

Investing Opportunity Score: 43%

Based on my Opportunity Score formula, TRP (TSE:TRP, NYSE:TRP) has a score of 43% (the higher the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% will have a short window of opportunity unless the stock got beaten down for other qualitative reasons.

I see a strong business and with the dividend growth expectations, it’s definitely a stock to consider for income investors. The Chowder Rule score is not quite where I would like it to be compared with other energy stocks such as Enbridge (TSE:ENB). In fact, Enbridge Income Fund (TSE:ENF) might be a better play for income seekers at the moment since it boasts a 6% dividend yield with better growth. The capital spending and acquisitions TRP is doing should lead to growth but how long will investors have to wait is the big question.

Do you want to find out where the competitors stack up against TRP? There are 22 stocks in the energy sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

Disclosure: At the time of writing, I have a position in TRP, ENF and ENB. See my Stock Portfolio for my current holdings.

Disclaimer: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your decision at your own risk – see my full disclaimer for more details.