TransCanada (NYSE:TRP) has endeared itself to investors over the years. That's what happens when a company increases its dividend for 17 straight years while delivering 14% average annual returns in the process. However, that history isn't why I love the pipeline giant. Instead, I'm enamored with what it offers investor today as well as where it's heading in the future. Here are five reasons why my affection for TransCanada continues to grow.
No. 1: It has a low-risk business model
One of the most attractive features of TransCanada is the low-risk nature of its operations since 95% of its earnings come from regulated assets and long-term contracts. That's up from 90% a few years ago as a result of the company's focus on high-grading its portfolio by jettisoning riskier assets and replacing them with those the generate predictable cash flow. With such a large percentage of its earnings locked in, there's little risk that a market downturn will impact its financial results.
No. 2: It has a rock-solid financial profile
TransCanada further reduces risk by maintaining a strong balance sheet, backed by an investment grade credit rating and low leverage ratio. That financial strength provides the company with unparalleled access to the financial markets to fund its strategic growth plan.
For example, last April the company issued 500 million Canadian dollars ($393.9 million) in preferred shares yielding 5.5% to help fund its capital program. Contrast that rate with what financially weaker rival Targa Resources (NYSE:TRGP) paid last year.
In mid-March, Targa Resources issued $1 billion of preferred stock that paid a steep 9.5% rate. On top of that, Targa Resources issued 20 million warrants to buyers of those preferred that gave them the right to buy its stock at set prices. It was a high price to pay but necessary considering that Targa had upcoming debt maturities it needed to address.
No. 3: It pays an attractive dividend
One of my favoriteTransCanada features is its dividend, which at the moment yields a generous 3.6% and is well above the 1.9% yield of the S&P 500. That said, not only does TransCanada currently pay its investors very well but that payout is on solid ground. That's due to the low-risk nature of the company's business, its solid financial profile, and because it typically pays out less than half its distributable cash flow.
That's a much more conservative payout ratio than most rivals'. Targa Resources, for example, currently expects to pay out all its cash flow this year in dividends. Meanwhile, Plains All American Pipeline (NASDAQ:PAA) is on pace to pay out more cash flow that it produces this year. That's why Plains All American Pipeline recently warned that it might need to reduce its payout again to what it hopes is a sustainable rate for the long term. Given TransCanada's healthy coverage ratio and overall financial strength, investors do not need to worry about a dividend reduction.
No. 4: It offers visible near-term growth
Instead, TransCanada's dividend will likely continue to grow over the next few years. The company initially anticipated that it would increase its payout by an 8% to 10% rate through 2020 when it unveiled its accelerated growth plan in late 2015, which is up from its prior pace of a 7% compound annual growth rate. However, with the addition of Columbia Pipeline Group last year, the company now anticipates that it will increase the dividend at the upper end of that range. Supporting that forecast is the fact that TransCanada has CA$24 billion ($18.9 billion) of high-return expansion projects underway that should enter service over the next few years. That's up CA$2.2 billion ($1.7 billion) over just the past few months after it recently secured two additional expansion projects.
No. 5: The longer-term outlook is just as bright
On top of that secured project backlog, TransCanada has another CA$40 billion ($31.5 billion) of medium to longer-term projects in development that should enable it to keep growing over the next decade. These include the Keystone XL pipeline, which the company has recently revived, and two other major pipeline projects in Canada. In addition, the company recently secured an agreement to keep its Bruce Power plant in operation until 2064. It plans to invest CA$5.3 billion ($4.2 billion) to refurbish and extend the life of the facility starting in 2020.
In addition, there should be plenty of opportunities to secure additional projects over the coming years. Driving that view is a forecast by the INGAA Foundation, which found that the U.S. and Canada will need to spend about $26 billion per year on new energy-related infrastructure through 2035. The industry will need to invest about 60% of that capital on new natural gas infrastructure, which is right up TransCanada's alley since that's its core focus.
A lovely formula
There's a lot to love about TransCanada. Not only should it deliver a steadily growing income stream but healthy capital gains as well, which is quite impressive considering its lower risk profile. Given that forecast, now would be an excellent time to start a long-term relationship with this top-notch pipeline stock.