TransCanada (NYSE:TRP) has a long history of creating value for investors. In fact, the company since 2000 has delivered an average annual return of 14% and increased its dividend every single year over that time frame. That said, even better days appear to be up ahead given the company's forecast, which it backs with a top-tier financial profile and a massive backlog of high-return growth projects.
Starting to launch
TransCanada unveiled its latest new five-year growth plan at its Investor Day in November 2015. At the core of that strategy was a backlog of 13 billion Canadian dollars ($10.3 billion) of short-term growth projects and an inventory of CA$35 billion ($27.8 billion) of commercially secured longer-term projects. Those investments positioned the company to deliver 8% to 10% average annual dividend growth through 2020, which was an acceleration from the 4% compound annual growth rate it produced in the previous five years. Further supporting that plan was the fact that it had a low-risk business model where 90% of its earnings came from regulated assets and long-term contracts, and it also boasted an A-rated balance sheet as well as a conservative dividend coverage ratio since it paid out less than 50% of its annual cash flow.
TransCanada has gone on to complete several strategic objectives in the two years since launching the plan that has enhanced its ability to achieve that ambitious dividend growth goal. Topping the list was last year's $13 billion acquisition of U.S. gas pipeline company Columbia Pipeline Group. That transaction has not only increased the company's earnings in recent quarters due to the incremental cash flow from Columbia's existing operations, but it will drive future growth since Columbia had $7.3 billion of growth projects under development. That transaction positions TransCanada to deliver annual dividend growth toward the upper end of its 8% to 10% range.
A deepening pipeline of opportunities
Buying Columbia was just one of a slew of strategic initiatives TransCanada has completed over the past two years to bolster its ability to create value for investors. One result of this transformation is that TransCanada now generates 95% of its earnings from stable regulated and fee-based sources. Meanwhile, its growth project backlog now stands at CA$25 billion ($19.9 billion) of near-term projects and over CA$45 billion ($35.8 billion) of medium- and longer-term projects.
Not only has the company increased the visibility of its short-term backlog, while adding new projects into the fold, but it has achieved several milestones on some of those longer-term projects that increase the confidence it can keep growing. One significant accomplishment is an agreement to extend the operating life of its Bruce Power nuclear plant until 2064. That deal will result in the company investing CA$5.3 billion after 2020 on major component replacements.
Meanwhile, it has continued to work on locking down some of its transformational pipeline projects. For example, due to the administration change in the U.S., the company is starting to make progress on its proposed Keystone XL pipeline and recently launched an open season to secure shippers for that $8 billion project. The company has also received some clarity on two proposed pipeline projects that would move natural gas from shale plays in Western Canada to liquified natural gas (LNG) export facilities along the West Coast. On the downside, it found out that Malaysia's Petronas won't move forward with the Pacific NorthWest LNG project, which will result in the cancellation of the CA$5 billion ($4 billion) Prince Rupert Gas Transmission project. However, it's growing increasingly likely that Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) will proceed with LNG Canada. While Shell has yet to reach a final investment decision on the CA$40 billion ($31.9 billion) project, according to a recent report, Petronas is considering joining Shell's team. That means TransCanada has a better chance of developing its proposed CA$4.8 billion ($3.2 billion) Coastal GasLink project.
Moving forward with some of these longer-term growth projects will enable TransCanada to extend dividend growth well into the next decade. Furthermore, given the sheer size of these projects, they could deliver needle-moving growth.
Significant earnings growth up ahead
According to TransCanada's projections, its comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) is on pace to increase from CA$5.9 billion ($4.7 billion) in 2015 up to CA$9.3 billion ($7.4 billion) by 2020. That forecast gives it confidence that it can deliver close to 10% annual dividend growth over that same time frame. Meanwhile, with a massive inventory of projects waiting in the wings, the company could double its 2015 earnings level by early next decade. Suffice it to say, TransCanada's best days appear to be ahead of it.
David Gardner has no position in any of the stocks mentioned. Matthew DiLallo has no position in any of the stocks mentioned. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.