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1 Thing is Clear, This 4.9%-Yielding Dividend Is Heading Much Higher in the Coming Years

By Matthew DiLallo - Feb 21, 2018 at 2:04PM

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TransCanada Corp.’s CEO says the pipeline operator has plenty of fuel to continue increasing its payouts.

TransCanada Corp. (TRP 1.54%) recently reported solid fourth-quarter results, returning to growth mode after hitting a speed bump in the third quarter. Those results, along with the growth projects the pipeline operator has in the works, gave management the confidence to boost its already high-yielding dividend by 10.4% for this year, pushing the yield close to 5%. Not only was that increase above the high end of TransCanada's target range once again, but CEO Russ Girling made it plain on the Q4 conference call that his company has plenty of fuel to continue raising its payouts. 

Firming up the foundation

Girling used the first part of his prepared remarks to detail why 2017 was so successful for the company. As he noted, "in addition to delivering record financial results, we did make significant progress on a number of other fronts that will position us for continued growth and success." These achievements included completing the integration of Columbia Pipeline Group, buying Columbia's former MLP, selling several non-core assets, and placing 5 billion Canadian dollars ($4 billion) of expansion projects into service.

Rising stacks of coins with growing plants on each one.

Image source: Getty Images.

TransCanada was also active in the capital markets, where it raised funds for its expansion projects. Girling said the company completed more than CA$6 billion ($4.7 billion) in financings at "very compelling terms." Meanwhile, it dropped down two assets to its MLP, TC Pipelines (TCP), for $765 million. That deal enabled TC Pipelines to increase its distribution to investors by 6% while allowing TransCanada to raise cash and still benefit from those pipelines via its stake in the MLP. "Our overall financial position remains strong, supported by our A-grade credit ratings, and we remain well positioned to fund our capital program in the coming years," he said.

Meanwhile, as noted above, the company boosted its dividend by 10.4%, making this the 18th year in a row that it has raised the payout. "At the same time," Grilling said, "we have maintained strong coverage ratios with our dividend representing a payout of...approximately 40% [of] internally generated cash flow, leaving us with the financial flexibility to continue to invest in our core businesses."

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

Building a dividend-growth juggernaut

That company is using its financial strength to continue advancing its CA$23 billion ($18 billion) capital program. However, what's noteworthy about that number is how quickly the company is replacing projects it places into service. After finishing CA$5 billion ($4 billion) of expansions in 2017, Girling pointed out that "we replenished our growth portfolio by adding more than CA$3 billion ($2.4 billion) of Canadian and U.S. natural gas pipeline expansions to our inventory of commercially secured projects" last year. Meanwhile, the company is off to a great start in 2018, having secured an additional CA$2.4 billion ($1.9 billion) expansion program on its NGTL system in Canada. Those projects are a big part of the reason that management feels confident it will be able to make further annual dividend hikes at the upper end of an 8% to 10% range through 2020, and an additional 8% to 10% increase in 2021. Girling clarified that this would all be "supported by expected growth in earnings and cash flow and strong distributable cash flow coverage ratios."

Meanwhile, the company's longer-term outlook continues to improve. "We also advanced over CA$20 billion ($15.8 billion) of medium to longer-term projects, including the Keystone XL Pipeline, the Coastal GasLink Pipeline, and the Bruce Power Life-Extension Program," said Girling. "Success in advancing these initiatives could extend our dividend growth outlook through 2021 and well beyond."

Its most promising prospect is the Keystone XL Pipeline. Once left for dead, the Trump administration has revived that project, enabling TransCanada to press forward. The company hit a key milestone earlier this year by securing enough contracts from shippers to provide "a return on capital that is consistent with the returns we earn on similar projects in our portfolio," according to Girling. While the company still needs to secure the rights of way and other permits, it could potentially start construction next year, in which case the line could be in service and generating cash flow by 2021.

Tantalizing numbers for income seekers

If there's one thing that was made clear on the conference call, it's that this company has the financial strength and fuel in the tank to grow its dividend at a high rate over the next several years. That makes TransCanada's stock a great option for income investors to consider holding for the long haul.

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