TransCanada (TRP 0.33%) has a long history of growing shareholder value. Overall, the Canadian pipeline giant has increased its dividend in each of the past 19 years -- including an 8.7% raise for 2019 -- which has helped fuel 12% total annual returns over that time frame. As a result of that steady diet of dividend increases, TransCanada currently offers an attractive 4.7% yield.
The company firmly believes it's well positioned to continue creating value for its investors. That was a key message of CEO Russ Girling on the company's fourth-quarter conference call, where he outlined three key aspects of its value proposition.
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1. Built to last
Girling stated on the call: "[O]ver the past 20 years, we have transformed ourselves into a leading North American energy infrastructure company with a very strong track record of delivering long-term shareholder value. Our assets are critical to the functioning of the North American economy, and the demand for our services continues to grow."
TransCanada has invested billions of dollars over the past two decades to both diversify and expand its portfolio. As a result, Girling noted: "Today our 100 billion Canadian dollar [$75 billion] asset portfolio generates approximately CA$8.6 billion [$6.5 billion] of annual EBITDA with approximately 95% of that coming from regulated business models or long-term contracted assets. Looking forward, we have five significant platforms for growth: Canadian, U.S., and Mexico natural gas pipelines, liquids pipelines, and energy."
TransCanada's portfolio consists of two key characteristics. First, it's very stable, since about 95% of the company's earnings come from predictable sources like fee-based contracts. That's by design, as the company made a concerted effort in recent years to sell more volatile businesses and replace them with assets that generate steady income. In addition, the company boasts a large-scale, diversified portfolio, which provides it with multiple avenues to expand in the future.
Check out the latest earnings call transcript for TransCanada.
2. The ability to continue growing
Girling continued:
And just as we have done since 2000, as we advance our CA$36 billion [$27 billion] secured capital program, we expect to deliver continuous growth in earnings, cash flow, and dividends per share. In addition, we have more than CA$20 billion [$15 billion] of projects that are in advanced stages of development and we expect numerous other growth opportunities to emanate from our extensive critical asset footprint.
The reason TransCanada has created so much value for its investors over the years is that its expansion initiatives have grown its cash flow at a healthy pace, which has enabled the company to increase its dividend at a meaningful rate. That should continue over the next several years since the company has a large backlog of high-return expansions under construction and more in development. These projects currently position TransCanada to grow its earnings at a 9% compound annual rate off 2015's base through 2021, which should enable it to increase its dividend at an 8% to 10% yearly rate over that timeframe.
3. A history of maintaining a solid financial profile
Finally, Girling concluded by pointing out that "we have a history of prudently funding our capital programs, and we are on track to continue to de-lever our balance sheet post the 2016 acquisition of Columbia and achieve our targeted credit metrics." Another driver of TransCanada's ability to consistently create shareholder value over the years is that the company has maintained a conservative financial profile. For example, while many pipeline peers were paying out more than 90% of their cash flow to investors, TransCanada has historically paid out about 40% of its internally generated cash flow, enabling it to retain more excess cash to finance expansions. It therefore hasn't had to borrow as much money nor sell as much stock as its peers to fund growth. The company's more conservative approach also gave it the flexibility to stretch for the right opportunity, which was the case when it bought Columbia. While that deal did negatively affect leverage, TransCanada is working hard to get back to its target range by investing in high-return expansions and selling non-core assets.
A low-risk income stock for the long haul
TransCanada has worked hard to build a top-tier energy infrastructure company by investing to diversify not only across several platforms but also on assets that generate predictable income while maintaining a sound financial profile. That has allowed the company to grow its cash flow and dividend at healthy rates over the past two decades, which has created significant value for shareholders. TransCanada fully expects that trend to continue in the years ahead, given the growth it has coming down the pipeline, which is what makes it an ideal stock for income-seeking investors to buy and hold.
