This Canadian High Dividend Stock is Over 20% Undervalued

This company is a pipeline firm – one of Canada’s lifelines – and its 7.8% forward dividend yield is ‘highly secure.’

Ruth Saldanha 22 November, 2023 | 4:28AM
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Key Morningstar Metrics for TC Energy Stock

We recently featured a long-time Canadian favourite stock – Enbridge – as our stock of the week, highlighting the fact that the multinational pipeline and energy looks more like a utility – which is good news for dividend investors. Today, we want to talk about one of Enbridge’s peers – a company and stock that boats a forward dividend yield of 7.8%, has a narrow economic moat, and is undervalued. The stock is TC Energy.

TC Energy Stock Dividend is Highly Secure

Calgary-based TC Energy – Ticker TRP – faces many of the same challenges as Canadian pipeline peer Enbridge but also offers important contrasts. Both firms offer a 5%-7% growth profile and a utilitylike 95%-98% of earnings that are highly regulated or contracted, with several years of project backlog, despite Enbridge largely focusing on oil assets, while TC’s focus is natural gas.

Morningstar Analyst Stephen Ellis points out that the company is making good progress in several areas, including the mechanical completion of Coastal GasLink while maintaining its budget at $14.5 billion, addressing an incremental $3 billion in asset sales, and progressing on the planned 2024 liquids spinoff.

Ellis says that TC Energy offers a highly regulated business model that has relatively low risks but also attractive exposure to LNG growth in the U.S. and Canada, as well as Mexican gas exports. We think its pending liquids spin-off in 2024 could serve to better highlight core growth prospects at the remaining business while offering a new likely high-yield play.

Finally, he says that the dividend is highly secure, given management's consistent 60/40 investment approach towards investing in the business and returning capital to shareholders. Right now, TC Energy’s Stock is trading at a 21% discount to Ellis’s $63 fair value estimate. For Morningstar, I’m Ruth Saldanha

 

 

bulls TC Energy Stock Bulls Say

  • TC Energy has strong growth opportunities in Mexican natural gas as well as liquefied natural gas.
  • The company offers virtually identical growth prospects and a protected earnings profile to Enbridge but allows investors to bet more heavily on natural gas.
  • The Canadian regulatory structure allows for greater recovery of costs due to project cancelations or producers failing compared with the U.S.

bears TC Energy Stock Bears Say

  • The firm is still expected to rely on capital markets for about 20% of its spending program, while Canadian and U.S. peers are already generating free cash flow after dividends.
  • TC Energy is expected to remain more highly leveraged than most midstream peers over the next few years as it is only targeting long-term leverage levels in the high 4s.
  • Carbon taxes for Canada are expected to be $170 a ton in 2030, putting pressure on the pipeline businesses.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
TC Energy Corp39.44 USD0.38Rating
TC Energy Corp53.33 CAD0.45Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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