TC Energy (TRP 1.75%) has been a model of dividend durability over the years. The Canadian energy infrastructure giant has increased its payout for 21 consecutive years, following its recent announcement of a 7.4% dividend boost for 2021. That's an impressive track record considering that most of its peers in the energy sector haven't been able to maintain their dividends, let alone continue growing them.
The company expects the upward trend in its 5.6%-yielding dividend to continue for the next few years. The durability of TC Energy's business model and its fully fueled growth engine are driving the company's outlook.
Stability amid the storm
TC Energy proved its resilience last year by delivering solid results despite all the energy sector turmoil. The company generated 9.4 billion Canadian dollars ($7.4 billion) of comparable EBITDA in 2020, a mere CA$15 million ($11.8 million) below 2019's level. Meanwhile, comparable funds generated from operations (FFO) came in at CA$7.4 billion ($5.8 billion), up nearly 4% year over year.
The company's diversified and durable business model paid off last year. On the one hand, it faced a couple of notable headwinds. First, all the turbulence in the oil market impacted the Keystone Pipeline System's volumes and earnings. On top of that, TC Energy's Bruce Power nuclear plant produced less electricity because the company started a project to extend that facility's life. It also sold some assets. However, the company offset those headwinds thanks to higher earnings on its natural gas pipelines due to expansion projects and higher rates.
The fuel to keep growing
TC Energy ended 2020 with about CA$20 billion ($15.7 billion) of secured capital projects underway. The company has several projects to expand its natural gas pipelines in Canada and the U.S. and has a major investment to extend Bruce Power's life. It expects these projects to enter service through 2024, growing its earnings and cash flow as they do. In TC Energy's estimation, these expansion projects should give it the fuel to increase its dividend at a 5% to 7% annual rate over the next several years.
Meanwhile, the company continues to see significant expansion opportunities in the energy sector, even as the global economy shifts to cleaner fuel sources. In the medium term, TC Energy believes it should benefit by leveraging its existing network to capture incremental growth opportunities from coal-to-gas switching in the Alberta power sector and the growth of LNG exports on the east and west coasts.
Meanwhile, in the longer term, it sees the potential to convert some of its natural gas compression assets to compress electricity. On top of that, it plans to evaluate opportunities to participate in the alternative transportation fuels business by exploring renewable natural gas and hydrogen projects. It also has a long history of investing in renewable energy projects.
TC Energy has ample financial flexibility to deliver on its current expansion program and capture new opportunities. The company only pays out about 40% of its cash flow via dividends, enabling it to retain and reinvest the other 60% on expansion projects. On top of that, it has a strong balance sheet, which gives it additional funding capacity to invest in expansion projects and make acquisitions. The company is currently in the process of acquiring its U.S. MLP affiliate TC Pipelines (TCP) in a $1.68 billion deal. That deal will give it full control over several natural gas pipelines, simplify its corporate structure, and reduce costs. TC Energy could pursue additional acquisitions in the future, buying other companies and assets that complement its existing portfolio or extend its reach into cleaner alternatives.
A fully energized dividend
TC Energy has been an excellent income stock over the years, having now delivered more than two decades of dividend growth. It's showing no signs of stopping, as it has enough secured expansion projects to continue increasing its payout at a 5% to 7% annual pace for the next several years. Meanwhile, it's looking for opportunities in the energy transition to make sure it can keep growing. Overall, TC Energy looks like an excellent dividend stock to buy and hold for the long haul.