I would like to get your opinion of TC Energy Corp. (TRP-T). I’ve been watching the share price fall, and the dividend yield has risen to nearly 8 per cent. This reminds me of Algonquin Power & Utilities Corp. (AQN-T), which as you know cut its dividend earlier this year. Do you see TC Energy doing the same? Do you plan to continue holding it in your model dividend portfolio?
No, I don’t expect TC Energy to cut its dividend. Yes, I plan to continue holding the stock in my model Yield Hog Dividend Growth Portfolio, as well as in my personal portfolio. (View the model portfolio online at tgam.ca/dividendportfolio).
TC Energy has its challenges, to be sure, but it’s not another Algonquin.
Here are three reasons I’m hanging on to the shares.
The dividend is well covered
When the extent of Algonquin’s problems became known late in 2022, analysts immediately questioned the sustainability of the dividend. Two months later, Algonquin slashed its payout by 40 per cent.
I’m not hearing the same speculation about TC Energy. Even as it plans to split itself into two companies next year – one holding its liquids pipelines business, the other its natural gas and power assets – the combined dividends from both companies are expected to be the same as before the split.
What’s more, the company recently reiterated its forecast that the total dividend will continue to grow by 3 to 5 per cent annually. Is that a slam dunk? No. Dividend increases aren’t official until the board approves them. But unless things deteriorate dramatically, a cut does not appear to be in the cards.
TC Energy has a substantial cash flow buffer protecting its dividend. In 2022, it paid out 49 per cent of its adjusted funds from operations (AFFO) – a measure of the cash-generating ability of the business – as dividends. For 2023 and 2024, the AFFO payout ratio is expected to rise to 53.6 per cent and 55.3 per cent, respectively, according to estimates by Robert Catellier, an analyst with CIBC Capital Markets. That still leaves a significant cushion for the dividend.
The stock’s valuation is attractive
Rising interest rates and ballooning costs for TC Energy’s Coastal GasLink project have been hammering the company’s shares for more than a year. The stock came under renewed pressure in July when the company announced it was selling a 40-per-cent stake in its Columbia Gas and Columbia Gulf transmission assets to a joint-venture partner for $5.2-billion, just six years after acquiring parent Columbia Pipeline Group.
The good news is that the sale will provide cash to reduce TC Energy’s uncomfortably high debt load, giving it more financial flexibility to pursue its $33-billion capital program, which includes investments in its natural gas pipelines, Bruce Power nuclear operations and decarbonization initiatives. The bad news is that the price of the Columbia sale represented a multiple of about 10.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) – lower than the 11 times EBITDA multiple at which analysts had been valuing potential asset sales.
Predictably, the market took the news badly. TC Energy’s announcement a few days later that it plans to spin off its liquids pipelines into a new company only added to investors’ unease. The stock promptly fell to its lowest levels since January, 2016.
But that’s when the bargain hunters stepped in. Prior to this week’s rebound, the shares were trading at about 10.5 times estimated 2024 earnings per share, the lowest price-to-earnings multiple since 2005, RBC Dominion Securities analyst Robert Kwan said in a note to clients.
“We believe the stock setting new P/E valuation lows is unwarranted, and that it is not unreasonable for the stock to recover” to a P/E of about 12.5 times, he said, implying a target price of about $54. The shares closed Friday at $48.19, up $2.94 or 6.5 per cent on the week, with a yield of 7.6 per cent.
The Coastal GasLink nightmare may be nearing an end
When TC Energy announced Coastal GasLink – a 670-kilometre pipeline that will carry natural gas across Northern British Columbia to a liquefaction facility in Kitimat – the cost was initially estimated at $6.2-billion. But owing to a confluence of factors, including the pandemic, soaring labour costs, skilled worker shortages and environmental protests, the price tag had risen to an estimated $14.5-billion as of February.
Given the project’s history of massive cost overruns, investors were relieved when TC Energy said recently that it expects to finish construction of the pipeline – which is more than 90-per-cent complete – by the end of the year and within the revised budget. Some investors (this one included) will probably be sleeping with one eye open for the next few months, but when the Coastal GasLink construction debacle is behind it and the project is generating cash flow – instead of consuming it – more investors may start to warm up to the stock.
“We share investors’ disappointment and regret holding the stock through this turbulent time, but we do not believe it is the right time to sell the shares,” said Cory O’Krainetz, an analyst with Odlum Brown, in a note following TC Energy’s second-quarter results late last month. “TC still owns critical natural gas infrastructure and has numerous opportunities to participate in the global energy transition. The dividend yield is also compelling at close to 8 per cent.”
For all these reasons, TC Energy remains a core holding in my dividend portfolio.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl