TC Energy Corp. (TRP-T) is a frustrating stock for investors: It has slumped more than 30 per cent over the past 14 months amid concerns about high debt levels, asset sales and now the uncertainties surrounding a coming spinoff of its oil pipelines.
But the argument for sticking around is compelling. The worst may be over for the Calgary-based energy infrastructure company, giving investors a dividend yield that has been hovering around 8 per cent this week, after a couple of tough years.
The U.S. government cancelled the Keystone XL pipeline project in 2021, dashing TC Energy’s plans for carrying Alberta crude to refineries in the U.S. Midwest. Its Coastal GasLink pipeline in British Columbia has suffered tremendous cost overruns, adding more stress to its balance sheet.
TC Energy’s debt relative to its operating earnings has risen to levels that have attracted the attention of credit-rating agencies – garnering recent downgrades from Moody’s Investors Service and DBRS Morningstar.
The company announced in July that it had agreed to sell a 40-per-cent stake in its U.S. Columbia gas-transmission systems, but the price disappointed some observers and sent TC Energy’s share price tumbling more than 7 per cent over two trading days, toward seven-year lows.
In the latest move, also in July, TC Energy announced that it will spin off its oil pipelines from its core natural-gas operations, surprising some observers.
In addition to these operational challenges, TC Energy has also faced a difficult investing backdrop. Rising interest rates since 2022 have diminished the appeal of some slow-growing dividend stocks, by making fixed-income products – including bonds and guaranteed investment certificates – more competitive.
Add it up, and that’s a lot for investors to digest. But some disappointed institutional investors are holding on, bolstering the case for a stock that is already reflecting a lot of bad news and uncertainty.
“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,” Cory O’Krainetz, an equity analyst at Vancouver-based investment company Odlum Brown, said in a July 28 note.
There are at least four reasons to consider buying the stock at its beaten-up lows.
First, the dividend yield is gargantuan, offering a buffer against a further decline in the share price and an attractive way for investors to wait out the current downturn.
The quarterly payout, currently 93 cents per share or $3.72 annually, appears safe, too: The company is distributing less than 54 per cent of its estimated cash flow for 2023, according to Robert Catellier, an analyst at CIBC Capital Markets, giving it some breathing room.
As well, Mr. Catellier expects that TC Energy can raise its dividend by 3 per cent to 5 per cent annually through 2026, propelled by more than $30-billion of growth projects and the company’s own dividend projections.
Second, the stock’s valuation is low, which suggests that pessimism is already priced in. The shares trade at 7.4-times reported earnings, down from a P/E ratio of 15 just one year ago, implying little downside risk even if the company’s earnings turn weaker.
Third, consider that TC Energy isn’t suffering alone. Other pipeline operators are also struggling to appeal to investors in a rising-rate environment and facing widespread opposition to expansion. The result: bruised share prices.
Pembina Pipeline Corp. (PPL-T) and Enbridge Inc. (ENB-T) are both down more than 15 per cent over the past year. Among U.S. companies, Kinder Morgan Inc. (KMI-N) is down about 10 per cent over a similar period.
That doesn’t ease investors’ pain (I know: I own shares in Enbridge), but it reduces the chances that they are exposed to the specific risks of one company.
Lastly, consider that TC Energy’s spinoff of its oil pipelines, which the company expects to be completed in the second half of 2024, might actually work as planned.
The idea is that the smaller oil-pipeline network and the larger natural-gas network can function better as separate companies and attract more investor interest.
Investors who might be uncomfortable with exposure to the oil sands, for example, could see the gas pipelines as a necessity during the transition to cleaner energy sources, perhaps leading to the stock trading at a higher valuation after the split.
“The spinoff allows the two businesses to attract different shareholder bases, with one more low-carbon and growth focused” – referring to the gas network – “and the other dividend and income focused,” Mr. Catellier said in a note.
TC Energy is in a rut, but the company is doing something about it while signalling that the dividend is solid. Betting on a recovery could be a good move.