Investors Have Lots of Reasons to Love TC Energy Corp
December 23, 2019
TC Energy Corp Is One Top Dividend Stock for 2020
I like dividend hikes. I like it even more when a company promises to boost its payout several years into the future.
Case in point: TC Energy Corp (NYSE:TRP)
In November, the Canadian pipeline giant hiked its quarterly dividend by nine percent to $0.75 per share. That’s the company’s 19th consecutive distribution increase. The move will also raise the forward yield on TRP stock to a tidy 4.4%. (Source: “TC Energy to highlight sustainable long-term growth at Investor Day,” TC Energy Corp, November 19, 2019.)
But here’s the best part. CEO Russ Girling predicted that the company’s dividend will grow between eight percent and 10% through 2021. Beyond that, management expects the distribution to increase by between five and seven percent per year.
You can’t call those dividend hikes set in stone, of course. Any distribution bump will need board approval and depend on future cash flows. Still, management would not have made such promises unless they were sure they could deliver. And they have good reason to be optimistic.
Long-time readers know I’m a big optimist on America’s energy revolution. New technologies, such as horizontal drilling and hydraulic fracturing, have unlocked oceans of oil and gas. We’re pumping so much of the stuff, the United States could hit energy independence sometime in the next few years.
The country stands as a leader in natural gas, in particular. In 2018, total output hit a record 37.0 trillion cubic feet. That’s a 44% increase from a decade earlier. (Source: “The U.S. Is Overflowing With Natural Gas. Not Everyone Can Get It.” The Wall Street Journal, July 8, 2019.)
The problem? We don’t have enough infrastructure to physically ship, store, and process all of the natural gas coming out of the ground.
In areas like West Texas, drillers literally burn the stuff off at the wellhead because they don’t have any pipelines to ship it in. Also in Texas, natural gas prices turned negative for the first time ever. In other words, companies will actually pay you to take their inventory off of their hands.
Great news for TC Energy Corp. I have often described the company’s pipeline network as the “toll roads” of the energy patch. Management charges fees on every barrel of oil and gas shipped through their network.
Because customers have filled the existing pipelines to capacity, TC Energy has started jacking up its tolls. That has padded the company’s bottom line, providing plenty of funds for dividend hikes.
Chart courtesy of StockCharts.com
Management has three expansion opportunities to boost earnings further.
First, build new oil pipelines to accommodate surging production from the Alberta oil sands. Second, expand capacity on the company’s existing natural gas pipeline network. And third, construct new electric power stations, such as the company’s Bruce Power project, which will generate steady, recurring cash flows once it is online.
In total, TC Energy Corp has identified $50.0 billion in organic growth opportunities. From that, over $30.0 billion is already commercially secure.
This provides the company with a long growth runway. Over the next five years, analysts project that TC Energy Corp will grow its earnings per share at a high single-digit annual clip. But given management’s tendency to under-promise and over-deliver, that number could be conservative.
Granted, you can’t call TC Energy Corp a slam dunk. Environmentalists continue to hold up new projects. “Keystone XL,” one of the company’s new pipelines, remains in regulatory limbo. Higher interest rates and lower energy production could also ding the TRP stock price.
But given Girling’s bullish stance at the company’s Investor Day presentation in November, shareholders have good reason to be optimistic.
