TC Energy: Buy On The Dips For Higher-Than-Average Income
- TC Energy operates natural gas and liquids pipelines as well as power generating and natural gas storage facilities. Investors may be interested in its higher-than-average dividend.
- It has been bruised, but not beaten, by the Biden administration's decision to cancel its presidential permit for the Keystone XL pipeline.
- The company is financially strong and quite profitable; as a utility or near-utility, it enjoys monopolies or near-monopolies in many of the markets it serves.
TC Energy Corporation (NYSE:TRP), the pipeline company, offers one of the higher dividends available from well-established companies. At midday on March 31, 2021 the dividend yield was 5.5%, but, of course, the yield goes up and down as the share price goes down and up:
What is TC Energy?
Source: TC Energy website (media)
It is essentially a utility, one that is based on three core businesses:
- Natural Gas Pipelines: With a network of 58,000 miles, the company says in its annual report for 2020 that it supplies 25% of the natural gas delivered in the U.S.A., Canada, and Mexico.
- Liquids Pipelines: A 3,000-mile network that delivers nearly 3 billion barrels of crude oil and other petroleum liquids.
- Power and Storage: TC Energy owns or has interests in seven power generation facilities; collectively they produce enough electricity to power more than four million houses. Approximately 75% of that power is emission-less. It also asserts it is one of North America's largest natural gas storage businesses, with 653 billion cubic feet of storage.
It describes itself as "utility-like" because 95% of its business is "rate-regulated and/or contracted for the long-term with credit-worthy counterparties".
In reporting its results, it uses six segments, as shown in this table from the annual report, which also includes EBITDA per segment:
Turning to strategy, the company reported:
"For more than two decades, we have remained disciplined in our capital allocation model and focused on a long-term conservative strategy that has delivered consistent shareholder returns through all points of the economic cycle. We've returned approximately 40 per cent of our cash flow to shareholders through a strong and growing dividend, investing the remaining 60 per cent into complementary low-risk assets that continue to drive growth in earnings and cash flow per share and enduring shareholder value."
TC found itself in the news in January, when President Biden announced he was canceling the presidential permit for the Keystone XL pipeline. That was a blow to the company, and it announced it would take a "substantive, predominantly non-cash, after-tax charge to our earnings in first quarter 2021". However, TC president and CEO François Poirier said:
"While we were disappointed with the recent action to revoke the Presidential Permit for the Keystone XL pipeline, we have a large and diversified asset base that continues to perform extremely well and are advancing $20 billion of secured capital projects, together with a substantive portfolio of other similarly high quality opportunities under development".
On the same day, TC announced record earnings in 2020 and that it was increasing its quarterly dividend from $0.81 to $0.87.
There is a possibility the battle over Keystone may not be over, though. In mid-March, 21 states sued the Biden administration. Their lawsuit claims the President did not have the authority to change energy policies passed by Congress. Whether TC Energy has any appetite to continue pursuing the project is another question.
Its publicly-traded competitors and peers include the following: Enterprise Products Partners L.P. (EPD), Kinder Morgan Inc. (KMI), The Williams Companies Inc. (WMB), MPLX LP (MPLX), and ONEOK Inc. (OKE). Generally, competition varies by segment.
Over the past five years, it has handily outperformed those companies in total returns:
It has claimed in its annual report that it has competitive strengths, "Decades of experience in the energy infrastructure business, a disciplined approach to project management and a proven capital allocation model result in a solid competitive position". That's demonstrated to some extent by a return on common equity TTM of 16.45%.
These are two of the main metrics taken from the balance sheet:
- Total cash: $1.35 billion.
- Total debt: $39.38 billion.
The debt makes for some poor ratios, but, as a utility, TC invests a great deal of capital upfront to build its infrastructure and then reaps returns for generations. This chart shows its return on assets over the past decade:
The Seeking Alpha system gives TC top marks for profitability; this excerpt from its profitability table shows how it has outperformed its sector median.
Note the healthy margins shown in the table.
Now, let's look at the three main components of profitability: Revenue, EBITDA, and earnings per share. First, revenue growth over the past decade:
Second, EBITDA, to see how well it has managed its operations:
Third, earnings per share, which is profitability from a shareholder's perspective:
Observe that the company was hit hard by the oil price crash that occurred mid-decade, but managed to grow its earnings in 2020 despite a revenue setback.
One other note: Because of its margins and overall profitability, the company generated $5.55 billion last year in cash from operations (net income, adjusted for depreciation and asset values). Here's how its cash flow has fluctuated:
Dividend and share buybacks
B-minus is the score assigned by the Seeking Alpha system, despite a TTM yield of 5.5%. Why isn't the score higher? Because the share prices of its peers and competitors have dropped as well, pushing up their yields. For example:
- Enterprise Partners dividend yield: 7.91%.
- Kinder Morgan dividend yield: 6.28%.
- The Williams Companies dividend yield: 6.66%.
As the following 20-year chart shows, TC Energy's dividend per share (in dollars and cents) has steadily risen:
Source: Fourth-quarter 2020 earnings presentation, Slide 14
More importantly, though, TC has raised its dividend every year since 2000. That means 21 consecutive years with an increase.
Or we could say it is just four years and four increases away from gaining Dividend Aristocrat status. In addition to dividend increases, the Aristocrats must be among the S&P 500 stocks, have a market cap of at least $3 billion, and more than $5 million in daily trading. Because of these criteria, only 65 companies currently enjoy this status.
Investors perceive Dividend Aristocrats as stable companies, as leaders in their industries, and a reliable source of investment income. That means their shares often sell at a premium, which should provide better returns for shareholders who decide to sell and for the companies when they want to raise new capital.
As noted above, the company dedicates roughly 40% of its cash flow to dividends and the remaining 60% to investments in low-risk assets designed to improve financial results.
The dividend payout ratio varies according to the measures used. The TTM, GAAP ratio is 71.06%, while the TTM, Non-GAAP ratio is 80.16%.
While the dividend payments have been going up, so has the share count, meaning some of the increase in earnings per share is being lost to shareholder dilution:
Generally, TC Energy is more expensive than its peers and competitors in the Energy sector. For example:
- Of the four P/E ratios (GAAP, non-GAAP, TTM, and FWD), TC is more expensive than the sector median on three of them.
The PEG ratio, which puts price and earnings into the context of EBITDA growth, comes in two versions:
- PEG GAAP TTM: 1.16 versus the sector's 0.29.
- PEG Non-GAAP FWD: 4.36, which is 109% greater than the sector median.
Comparing its P/E ratio specifically with other major pipeline companies, on the basis of P/E Non-GAAP TTM, TC Energy's ratio of 15.19 is roughly in the middle of the pack:
- MPLX: 10.20
- EPD: 11.12
- KMI: 18.82
- OKE: 19.87
- WMB: 22.06.
While we can't use a discounted cash flow, DCF, calculation to determine if there is a margin of safety, it seems unlikely there is one at these valuations.
For investors considering TC Energy, there may be one overarching strategy: Buy on the dips. As we see in this 10-year chart, the share price goes up and down as the price of oil goes down and up. To get the bigger dividends, buy on the dips:
According to Nasdaq.com, 580 institutional investors have stakes in TC Energy, totaling 67.99% of outstanding shares. The three largest holdings are those of:
- Royal Bank of Canada (TSX:RY) owned 85,078,928 shares worth $4.062 billion at the end of 2020; during the fourth quarter, it expanded its holding by 0.257%.
- Capital Research Global Investors increased its stake by 6% in the fourth quarter and finished with 34,985,684 shares worth $1.670 billion.
- Capital International Investors upped its position by 10.38% and wound up the quarter and year with 31,746,048 shares worth $1.515 billion.
TC Energy's share price is down, and with that, the dividend yield is up. So, this would be a time to buy, assuming the company passes the due diligence of each investor.
This is a solid company, with billions of dollars' worth of assets that can't be replaced or bypassed easily, at least for another decade or two. While hopes are high for non-fossil fuels, there is quite a distance to go before they are meaningfully squeezed out.
It's also a solid company because of its financial strength and profitability, which perhaps is to be expected from a utility that has monopolies or near-monopolies in many of the areas it serves. Debt is high, but again, that's not unusual for a utility. High margins drive its profitability and they're not likely to disappear soon.
TC Energy will be of interest to income investors willing to take a modest risk in exchange for a higher-than-average dividend. Growth investors may be interested if they can buy during a dip. Value investors probably will shy away because there appears to be no margin of safety.
This article was written by
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