Canadian midstream energy company TC Energy (TRP -2.01%) has an impressive dividend growth streak of 21 consecutive years. The stock's current yield of 5.4% makes it extremely attractive for dividend investors. Apart from an appealing dividend income, several other factors make TC Energy's stock enticing. Let's see what makes TC Energy my favorite stock right now.
Extensive, irreplaceable asset footprint
The first thing that provides TC Energy with a significant competitive advantage is its strategically located and huge asset base. The company operates one of North America's largest natural gas pipeline networks, transporting roughly 25% of the total natural gas consumed in North America. Its liquids pipeline system transports 20% of all exports from the Western Canadian Sedimentary Basin (WCSB).
The takeaway capacity from the WCSB is limited, and new pipelines are difficult to build due to regulatory and environmental hurdles. Despite limited takeaway, heavy oil from Canada's oil sands finds robust demand from Gulf Coast refineries, which are designed to process this crude type. So TC Energy's liquids pipelines are usually highly used. TC Energy also owns seven power plants.
Steady fee-based cash flows
Rates on TC Energy's natural gas pipelines in Canada are regulated by the Canada Energy Regulator (CER). Similarly, its U.S. gas pipelines are regulated by the Federal Energy Regulatory Commission (FERC) and its Mexico gas pipelines are regulated by Mexico's Energy Regulatory Commission. So, these assets generally generate utility-type steady cash flows.
On the other hand, TC Energy's liquids pipelines and its power and storage assets are backed by long-term contracts. Overall, around 95% of TC Energy's earnings come from regulated or long-term contracted assets. Thus its cash flows are as steady as one can get for an energy company.
Strong financial performance
TC Energy's strong asset base and its regulated and fee-based operations have allowed it to steadily grow its earnings over the years.
As the above graph shows, TC Energy has steadily grown its profits as well as operational cash over twenty years. This, in turn, allowed the company to steadily grow its dividend during this period.
Despite COVID-19-related disruption, TC Energy grew its net income from CA$4 billion in 2019 to CA$4.5 billion in 2020.
Attractive dividend yield
TC Energy stock is currently trading at an attractive yield of 5.5%. That's higher than its 20-year average yield of around 4.1%. In the last year, TC Energy stock has underperformed the broader energy sector as well as its Canadian peer Enbridge. Concerns relating to TC Energy's growth after the revocation of presidential permits for its Keystone XL pipeline project likely contributed to the stock's recent underperformance.
Though surely a setback, the concerns might be overblown. That's because the company still has a healthy pipeline of capital projects that can fuel its growth in the coming years.
Healthy projects pipeline
Excluding Keystone XL, TC Energy has a secured projects pipeline of roughly CA$20 billion that it expects to complete through 2024. Gas pipelines and power and storage projects make up almost the entire projects backlog. As these projects will become operational, they will contribute to the company's earnings growth. It expects to complete around CA$4.2 billion of projects in 2021.
TC Energy aims to continue investing in projects that meet its return criteria. It is also looking at opportunities in the renewable energy space. Its healthy balance sheet allows the company to also look at asset acquisitions to fuel growth.
TC Energy aims to grow its dividend by 5% to 7% in the coming years. With a strong asset base, steady cash flows, and a healthy projects pipeline, it looks well positioned to achieve this growth. Overall, TC Energy's attractive yield and its healthy growth prospects make it my favorite energy stock right now.