Is TransCanada Corporation a Buy?

TransCanada (TRP +0.38%) has been a steady performer for investors over the years. Since 2000, for example, it has delivered 14% average annual returns for investors, thanks in part to delivering 7% compound annual dividend growth. Those returns could be even better over the next few years given that the company has enough growth projects coming down the pipeline to deliver accelerated earnings and dividend growth. That forecast, when combined with its relatively inexpensive valuation and compelling 3.9% yielding dividend, makes it an ideal stock for income-focused investors to buy.

A look at what's ahead

In late 2015, TransCanada unveiled a new five-year growth plan, backed at the time by 13 billion Canadian dollars' ($10.7 billion) worth of expansion projects that were well underway. The company believed that the fee-based cash flows from those projects when combined with its already stable portfolio and sound financial profile, would support 8% to 10% compound annual dividend growth through 2020.

Image source: Getty Images.

Last year, however, it took advantage of an opportunity to improve its growth profile by acquiring Columbia Pipeline Group. That deal not only bolstered earnings and cash flow in the near term but provided a significant boost to its backlog. In fact, TransCanada now has CA$24 billion ($19.7 billion) of short-term growth projects in progress thanks to the contributions from Columbia as well as other organic additions. As a result, it believes it can deliver dividend growth toward the upper end of its 8% to 10% range. Here's how that forecast compares to what other pipeline stocks currently anticipate:

Data source: TransCanada, Enbridge, Kinder Morgan, ONEOK, Williams Companies, and Targa Resources.

While TransCanada's current forecast doesn't stretch quite as far as Enbridge's outlook, the company compares favorably to the others when factoring in its current payout percentage. Meanwhile, it has an impressive backlog of projects in development, which could enable it to keep growing well beyond 2020. Overall, it has more than CA$40 billion ($32.9 billion) of long-term projects further down the pipeline, including CA$5.3 billion ($4.7 billion) of planned investments starting after 2020 to extend the life of its Bruce Power plant. While that's not as high as the CA$48 billion ($39.5 billion) backlog of commercially secured long-term projects that Enbridge has at its disposal to drive growth beyond 2020, it's head and shoulders above the rest of its peer group.

All that income and growth for a fair price

That said, despite offering greater visibility into future growth than its peers, TransCanada's stock trades in line with several rivals even though they have less visible growth prospects:

TRP EV to EBITDA (TTM) data by YCharts.

As that chart notes, Enbridge's premium dividend growth forecast comes with a premium price tag. However, what's worth noting is that TransCanada's equally impressive growth prospects hasn't inflated its value. Quite the contrary since it trades for around the same valuation multiple as Targa Resources, which is a surprise since that company can't afford to grow its payout at the moment due to its tight coverage ratio. Furthermore, while TransCanada is not as cheap as Kinder Morgan, which sells for an embarrassingly low multiple of free cash flow, nor Williams, it's still priced pretty sensibly compared to the group as a whole.

A solid buy for income-focused investors

TransCanada offers investors a nice blend of current income and growth potential for a reasonable price. Because of that, the company has the potential to deliver healthy total returns over the next few years. That income with upside is why TransCanada looks like a good stock for income-focused investors to buy, especially in today's arguably heated market.