Yahoo Finance TC Energy Stock: An Undervalued 7.8% Dividend Stock
Written by Kay Ng at The Motley Fool Canada
Large-cap energy infrastructure company TC Energy (TSX:TRP) has witnessed a tremendous drop in the stock in light of higher interest rates since 2022. To be clear, since 2022, the Bank of Canada has raised the benchmark interest rate from 0.25% to 5.0%. For now, the quantitative tightening continues as the policy interest rate stays at 5%.
Higher interest cost
Higher interest rates are a dampener on business growth as it makes debt costlier — namely for new and refinanced debt. For example, compared to the 2020 levels, TC Energy saw its 2023 interest expense increase by $746 million (i.e., an increase of over 40%), while its debt-to-asset and debt-to-equity ratios changed from 71% and 2.44 times, respectively, to 69% and 2.91 times. A higher amount of debt and a reduction in common stockholders’ equity both contributed to a higher debt-to-equity ratio.
Liquids pipeline business spinoff
Actually, even before 2022, as early as 2020, the company saw earnings-per-share growth slowing to 1-2%. As a way to shore up value for shareholders, after a two-year strategic review, the company finally came to a decision to spin out its liquids pipelines business, South Bow Corp., which should start trading publicly in the fall of this year, given the approval of shareholders. Both TC Energy and South Bow would be investment grade and together offer a dividend yield of 7.8% at writing.
Perhaps getting it ready for the spinoff, TC Energy has been making a number of asset sales, including natural gas transmission assets in Portland and gas transmission assets in Prince Rupert (announced in March). Asset sales are bound to reduce the company’s earnings and cash flows this year. This may be why the stock is trading at relatively low valuations.
Low valuation, big dividend
At about $49 per share at writing, TC Energy stock trades at a forward price-to-earnings ratio of roughly 11.8, which is a good discount of about 20% from its long-term, normal, fair valuation.
TC Energy stock’s close to 7.8% dividend yield provides generous income for investors. The best one-year Guaranteed Investment Certificate (GIC) rate is 5.35%. Not to mention that the stock trades at a decent discount, which could drive extra returns from price appreciation over the next three to five years, especially if interest rates start falling.
The large-cap stock has a long history of paying safe dividends. Since 2000, it has increased its dividend at a compound annual growth rate of about 7%. Because of slower growth in recent years, the dividend growth has fallen to about 3% per year.
Importantly, despite a drop in earnings, the company earnings should still cover its dividends with a payout ratio of less than 100%. The 2024 payout ratio is estimated to be roughly 92% of adjusted earnings.
Investor takeaway
TC Energy stock appears to be trading at a discount of about 20% from its long-term fair value. At this low valuation, it offers a rich dividend yield of almost 7.8%. So, it should appeal to income-focused investors as well as patient long-term investors.
Investors must be aware of the tax-free spin-off of its liquids pipelines business that’s likely to happen later this year. If you’re more bullish on gas infrastructure, you should consider investing in TC Energy after the spinoff.
Also, what’s notable is TC Energy will be reporting its first-quarter results on May 3. It’s also holding its annual and special common shareholder meeting on June 4. Interested investors should watch out for these for the company’s latest news, results, and outlook.
The post TC Energy Stock: An Undervalued 7.8% Dividend Stock appeared first on The Motley Fool Canada.
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Fool contributor Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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