TC Energy (TRP 0.50%) wrapped up another great year last week when it reported its fourth-quarter and full-year results for 2019. The company posted excellent numbers overall while also achieving several strategic objectives. Because of those successes, the Canadian pipeline giant increased its 4.1%-yielding dividend by another 8%, marking the 20th consecutive year that it boosted the payout.
This trend appears poised to continue. That was one of the takeaways from its earnings report, where three numbers stood out because they help support the view that the company has plenty of fuel to keep growing its dividend.
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1. A 9% year-over-year increase in comparable funds generated from operations
TC Energy hauled in $7.1 billion Canadian ($5.4 billion) of funds generated from operations last year, which was 9% above 2018's level. That healthy cash flow growth came in the face of several headwinds, including lower volumes and earnings on several of its pipeline systems and the impact of asset sales. TC Energy, however, more than offset those issues by placing CA$8.7 billion ($6.6 billion) of new assets into service last year.
Overall, the company produced enough cash to cover its dividend by roughly 2.5 times, implying about a 40% payout ratio. That's very low for a pipeline company where most typically pay out between 50% to 80% of their cash flow. As a result of its lower ratio, the company was able to retain a significant amount of the cash needed to finance its expansion program.
2. A debt-to-EBITDA ratio in the high fours
TC Energy has invested billions of dollars over the past several years to expand its operations. It has funded that growth through a combination of retained cash, stock and asset sales, and new debt. While the company has maintained a solid balance sheet throughout this period, its leverage ratio has trended slightly above its targeted level in the "high fours" over the past few years.
The pipeline giant, however, achieved its targeted credit metrics last year thanks to a combination of earnings growth and CA$3.4 billion ($2.6 billion) of asset sales. As a result, the company's balance sheet is in its best shape in years, which gives it the financial flexibility to continue expanding.
3. CA$30 billion ($22.6 billion) of growth still ahead
While TC Energy finished several expansion projects last year, it has been able to continue securing new ones to enhance its long-term outlook. It most recently announced a CA$1.3 billion ($1 billion) intra-basin system expansion in Western Canada and the $300 million Alberta XPress project that will expand its ANR pipeline in the U.S. to serve growing production in Canada.
With those recent additions, TC Energy has CA$30 billion of commercially secured expansion projects under way, which is the biggest backlog in the pipeline sector. That backlog drives the company's view that it can continue growing its earnings and support 8% to 10% annual dividend growth through 2021 and 5% to 7% yearly increases after that. Meanwhile, it has another CA$20 billion ($15 billion) of expansion projects in development, which further supports its longer-term growth forecast.
The formula for dividend greatness
TC Energy has everything an investor could want in a dividend stock. It generates a lot of cash, has a low payout ratio, a strong balance sheet, and visible growth up ahead. Because of that, the Canadian pipeline giant firmly believes it can keep growing its dividend for the next several years, which makes it an ideal stock for income-seeking investors.
