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TC Energy Corp. has been a standout performer in 2019, delivering a total return of 36 per cent that leads my model Yield Hog Dividend Growth Portfolio.

So is it time to sell and lock in my profit? Heck, no. A short-term pullback is always possible after such scorching gains, but I’m confident that the pipeline operator and power producer (formerly TransCanada Corp.) will continue to reward investors over the long run. Here’s why.

Interest rates lower for longer

Falling bond yields have given TC Energy (TRP) and other pipelines a boost, as slowing global economic growth has stoked speculation that central banks will chop interest rates. Through July 8, Pembina Pipeline Corp. (PPL) posted a year-to-date total return of about 23 per cent, Inter Pipeline Ltd. (IPL) was ahead 18 per cent and Enbridge Inc. (ENB) was up nearly 15 per cent (all returns include dividends). The tailwind from lower rates – which cut borrowing costs and improve stock valuations for pipeline operators – are likely to persist for some time. Even after stock markets sputtered after last week’s strong U.S. June jobs report, many economists still expect that the U.S. Federal Reserve will cut its benchmark interest rate at its July 30-31 meeting. The Bank of Canada, meanwhile, is expected to hold its rate steady this week and remain on the sidelines for the rest of the year, with a rate cut possible in 2020. Bottom line: The subdued rate environment bodes well for pipeline stocks.

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A steadily rising dividend

TC Energy has raised its dividend for 19 consecutive years, and it’s not about to stop now: Supported by expansion projects, the Calgary-based company has pledged to raise its dividend at an annual rate of 8 per cent to 10 per cent through 2021. Unlike the fixed income from bonds and guaranteed investment certificates, a growing dividend protects your purchasing power from the ravages of inflation. Just as important, it’s a sign of a healthy company and is often correlated with a rising stock price. TC Energy’s current dividend yield of about 4.6 per cent is not too shabby, either.

Plenty of growth ahead

To be sustainable, a growing dividend must be supported by increasing cash flow. Thanks to secured near-term projects totalling $30-billion (more than 70 per cent of which are in TC Energy’s core Canadian and U.S. natural-gas pipelines business) the company is poised to increase its distributable cash flow per share by about 8 per cent to 10 per cent annually through 2021 – in line with projected dividend growth – and by 5 per cent to 7 per annually beyond that, Industrial Alliance Securities analyst Jeremy Rosenfield said in a note. The company has another $20-billion of potential projects, including the Keystone XL pipeline, which would provide “material potential upside if/when KXL is finally approved/built,” Mr. Rosenfield said. He has a buy rating and $70 price target on the shares, which closed Tuesday at $65.65.

A solid balance sheet

Even as it invests in growth, TC Energy aims to deleverage its balance sheet and bolster its investment-grade credit ratings. To that end, the company has divested about $3.4-billion of non-core assets this year, including a deal announced July 3 to sell a U.S. gas gathering and processing business for about $1.7-billion. In addition to strengthening the company’s balance sheet to fund expansion, the sale slightly increases the already high proportion of TC Energy’s EBITDA (earnings before interest, taxes, depreciation and amortization) derived from regulated or long-term contracted assets with no volume or commodity price risk, BMO Nesbitt Burns analyst Ben Pham said in a note. (In 2018, 95 per cent of EBITDA was from such sources.) Noting that recent asset sales have been executed at attractive prices, Mr. Pham reiterated his “outperform” rating and $69 target price and said he “continue[s] to flag the stock as our favourite large cap pipeline recommendation.” Fourteen analysts, including Mr. Pham and Mr. Rosenfield, have a buy rating on the stock, with five holds and one sell. The average 12-month price target is $66.44.

A conservative payout ratio

TC Energy’s dividend payout ratio is about 74 per cent of estimated 2019 earnings, but the ratio drops to an even more comfortable 41 per cent based on distributable cash flow per share – a measure that excludes non-cash charges such as depreciation and amortization. This provides a nice buffer should the company hit a rough spot. That’s not to say TC Energy is without risks: An unexpected rise in interest rates, political setbacks, regulatory delays and environmental opposition are among the many risks that energy infrastructure companies face.

Closing thoughts

Nobody knows what TC Energy’s shares will do in the short run. But over the long run, the company’s increasing cash flow and rising dividend will almost certainly continue to produce solid returns.

Disclosure: The author also owns shares of TRP personally.

View John Heinzl’s complete model Yield Hog Dividend Growth Portfolio at tgam.ca/dividendportfolio.

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