John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
When I invest in a company, I don't want to lie awake at night worrying about what could go wrong. That's one of the main reasons I own TransCanada – it's predictable.
Since 2000, the Calgary-based pipeline operator and power generator has produced an annualized total return – from dividends and share price appreciation – of about 14 per cent.
I've owned the stock personally for more than a decade, and I've held it in my Strategy Lab model dividend portfolio since inception in September, 2012. Based on the company's steady performance – and, more important, its solid growth outlook – I expect that it will remain a core holding for many years to come. Here are five reasons that I continue to hold TransCanada and would consider adding to my position on any price weakness.
Dividend growth is accelerating
Since cutting back its dividend in 1999 as part of a major restructuring, TransCanada has raised its payment for 15 consecutive years. Recent increases have averaged between 4 and 5 per cent – a solid, if unspectacular, growth rate. But in November, TransCanada said it expected to raise its dividend by "at least" 8 per cent annually through 2017, and it followed through on that pledge with an 8.3-per-cent increase in February. A dividend increase is a strong signal of confidence; when a company increases its projected dividend growth rate, that's an even more bullish sign.
It's not all about Keystone XL and Energy East
When TransCanada makes the news, it's often about delays facing the proposed Keystone XL or Energy East pipelines. But the company also has about $12-billion of small- and medium-sized projects, most of which are already under construction and are expected to come into service by the end of 2017. These projects alone should be sufficient to drive the 8-per-cent projected dividend growth. If some of TransCanada's $34-billion of large-scale projects win approval – they include Keystone XL, Energy East and pipelines associated with proposed liquefied natural gas terminals in British Columbia – earnings and dividends would grow at an even faster clip.
The stock has potential upside
If some or all of TransCanada's megaprojects get the green light, the stock price would also likely rise. RBC analyst Robert Kwan said the stock's "upside scenario" – which assumes approvals for Keystone XL and Energy East – is $74 a share. That's a 34-per-cent premium to TransCanada's closing price of $55.37 Tuesday on the Toronto Stock Exchange. Regardless of the fate of those big projects, "the company is optimistic that it will continue to add to the smaller- to medium-sized project portfolio over time," Mr. Kwan said in a note. That, in turn, would keep the dividend growing well into the future.
The company is diversifying
TransCanada's natural gas pipelines account for about 60 per cent of earnings, but the company has been expanding its power generation and oil pipelines businesses, which account for the remaining 40 per cent. With 21 power plants – including nuclear, thermal, wind, hydro and solar – TransCanada is the largest private-sector electricity generator in Canada. Its oil pipeline business is also growing steadily even as Keystone XL and Energy East face various delays. "The result is a business much less reliant on natural gas and significantly enhanced … diversification," Edward Jones analyst Jeffrey Nelson said in a note.
Earnings are predictable
Although TransCanada is involved in the energy business, it's largely insulated from volatility in commodity prices. That's because most of its assets are secured by long-term contracts or have regulated business models. As a result, earnings are more stable and predictable than those of, say, an oil and gas producer that's directly exposed to commodity prices. Even though oil and natural gas prices have fallen about 49 per cent and 45 per cent, respectively, in the past 12 months, TransCanada's stock is up about 9 per cent.
Closing thoughts
No stock is without risks. If TransCanada were to shelve any of its large projects, the stock would probably take a hit. On the other hand, if those projects move forward, the stock would react favourably. In the meantime, investors receive a 3.8-per-cent yield and can look forward to dividend increases of about 8 per cent for at least the next several years.
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John Heinzl