TC Energy: A Reasonably Priced Stock with Positive External Factors

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Investment thesis

TC Energy Corporation (NYSE: TRP) is a dividend aristocrat and a top pick for income investors. This will not change in the coming years in my opinion due to the consequences of the Ukrainian war and incentives for North American energy independence. The company has a higher-than-usual debt-to-equity ratio, but nearly all of its debt is in fixed-rated, long-term debt, making it relatively safe, especially in the current economic environment. record inflation. I’m only neutral on TRP due to its fair valuation, but I think long-term income investors can benefit from adding TRP to their portfolio.

business model

TC Energy is a Canadian midstream natural gas company for over 70 years, but it also operates as an energy infrastructure company in North America. They operate 93,300 km (57,900 miles) of pipeline and over 653 billion cubic feet of natural gas storage in Canada, the United States and Mexico. In addition, the company has a smaller network of oil pipelines (4,900 km) and 7 power generation facilities capable of supplying more than 4 million homes. The vast majority of the company’s revenue comes from its gas pipelines (around 77%). US and Canadian pipelines are responsible for the lion’s share of TRP’s revenue, while in terms of assets, the company holds around 45% of its total assets in the US.

TC Energy revenue stream

Annual report 2021

External factors in favor

The war in Ukraine changed a lot of things in the natural gas industry in a few weeks. Natural gas prices have skyrocketed and, in addition, Russian oil sanctions have strongly affected the market. US and EU strike quickly LNG agreement as the EU seeks to cut off Russian supply (however, even with this deal, this is still impossible in the short term). American policymakers began to argue that this was also an energy war and that the United States had to be “energetically independent“. This will result in faster gas permits, fewer regulations for pipelines or regulations that were on the table will be postponed to ensure North America’s energy independence. All of these rapid changes are in favor of TRP. They will be in a better position to lobby, they can demand capital for certain projects and successfully lobby for less regulation. Additionally, TRP suppliers will pump natural gas as fast as they can due to widening profit margins. And since it seems for the moment that this war will not end soon, the high prices of natural gas will remain with us. Additionally, according to the EIA, American natural gas consumption will increase steadily until 2050.

Valuation of TRP

There is no doubt that TRP is a stable company, especially with the external factors working in its favour. The company has a leverage ratio of 1.59x which might seem high in this industry and you would be right. However, most of their debt is long-term and fixed-rate (about 86% of total debt is long-term debt). Additionally, high inflation will also be in their favor with the fixed rate debt they carry for the long term, so I’m not too worried about their 1.59x leverage ratio.

TRP has a non-GAAP P/E ratio of 17.06 above the industry median of 10.31, which would indicate that TRP is well overvalued, but compared to TRP’s 5-year average P/E ratio of 16 .24, the current figure is only slightly higher. . Also, if we compare TRP to Enbridge Inc. (ENB), we can see a lower P/E ratio as Enbridge has a forward P/E ratio of 18.93. In terms of TRP’s dividend yield, it’s trading at its 12-month low of 15% and you could have bought the stock with a better dividend yield at almost any other time in the month. year. This suggests a slight overvaluation, but considering all internal and external factors, I would say TRP is reasonably priced at the moment.

TC Energy dividend
Data by YCharts

Company specific risks

There are several risk factors for TRP, but most of them are not as relevant as before the war in Ukraine. Such as regulatory risk or ESG related risks, as they are still on the table, but TRP management is trying to mitigate these risk factors. The energy transition is a real risk even in the shorter term because with the surge in the price of natural gas, the price of alternative energies such as renewables will compete with natural gas. But the biggest risk factor I see is the risk of accidents. We cannot calculate a potential gas pipeline explosion, but there is a chance of it happening. I brought an example from 2017 to understand what will happen during the action in the event of an accident. In 2017, a pipeline operated by Kinder Morgan (KMI) exploded and created a massive fire. It was a relatively “small” incident, but the stock price fell almost 10% over the following months. In the event of a larger accident, the impact may be greater on the share price, not to mention the compensation that TRP may have to pay or the That’s why I think in the years to come , this risk can have the greatest negative impact on TRP.

My take on the TRP dividend

Current dividend

TRP is a Canadian Dividend Aristocrat with a consecutive dividend payment history of 32 years. This should come as no surprise, as TRP is very similar to Enbridge in terms of history, industry, revenue stream and dividend policy. TRP is currently yielding at 5.03%. Over the past 10 years, management has been able to increase the dividend by an annual average of 5.14%.

Future sustainability

The payout ratio is around 80-90%, which is acceptable for a large, established company. Since TRP is not a growth stock and operates in a very capital-intensive industry, the payout rate is considered to be in the safe zone. We can expect slow and steady dividend growth, as we are used to with TRP. Analysts estimate a dividend increase of 3.26% in 2022 and a similar increase in 2023 as well. The consensus rate is $0.7125 per quarterly share. I believe that due to positive external factors and positive regulations, this dividend increase may exceed expectations for the coming years.

TC Energy dividend payout ratio

The table is created by the author. All figures are taken from the company’s financial statements and SA earnings estimates.

Final Thoughts

Almost all external factors are in favor of TRP such as skyrocketing natural gas prices, growing energy demand from the United States and Canada until 2050, positive regulatory changes due to war and high inflation helping reduce their long-term fixed rate debt. term. These external factors are supported by stable and safe internal factors of TRP. I’m only neutral on TRP due to its 22% appreciation since the start of 2022, but investors looking for long-term income can calmly add the company to their holdings as TRP will provide them with a reliable source of income. .

Shirlene J. Manley