TC Energy Stock: A Solid 7% Yield With 23 Years Of Consecutive Raises (NYSE:TRP)

Capital gains can be fun to see on a brokerage account and can be a reflection of one’s investment acumen. However, despite how nice they appear on a statement, those gains simply don’t pay the bills and won’t improve one’s living situation unless they are sold for their profits.

When is a good time to sell? Will I have FOMO if the stock keeps shooting higher? Will I regret not selling if the stock drops from here? Those are questions that investors often grapple with when needs for capital arises.

That’s why another approach may be to just buy quality undervalued dividend payers that one doesn’t need to sell in order to raise capital. This brings me to TC Energy (NYSE:TRP), which I last covered here back in July of last year with a ‘Strong Buy’ rating, noting its valuable assets and undervaluation.

At that time, market sentiment was working heavily against the stock after management announced a planned spin-off of the liquids pipeline business, despite the transaction representing no change in the underlying ownership interest of the assets, as shareholders will own two companies instead of one.

It appears that my bullish take has paid off, as the stock has risen by 15% since then (19% total return), far outpacing the 7.4% rise in the S&P 500 (SPY) over the same timeframe. Despite TRP’s strong performance in recent months, its stock is still down by 6% over the past 12 months, resulting in a 7% yield, as shown below. In this article, I provide an update and discuss why TRP remains a good value and income addition at present, so let’s get started!

Why TRP?

TC Energy is a Canadian midstream energy giant, with a moat-worthy collection of pipelines, storage, and power-generating assets across the U.S., Canada, and Mexico. Notably, TRP moves 25% of North American natural gas and 20% of western Canadian crude oil, supplying U.S. refining markets in Illinois, Oklahoma, Texas, and the U.S. Gulf Coast, and over 95% of its earnings stem from highly regulated or contracted cash flows.

TRP has long-term growth for shareholders since 2000, with EBITDA growing over this timeframe amidst a number of industry-wide events such as MLP distress, COVID, Financial and Oil crises, and global conflict. This has also supported a respectable 7% dividend CAGR over the same timeframe, with 23 years of consecutive raises, as shown below.

One of the issues that the company has run into in recent years is cost-overruns at its Coastal GasLink project, which stretched the balance sheet. This project spans 416 miles and delivers natural gas from Northeastern British Columbia to an LNG facility in the same province, where the gas gets converted to LNG before being exported to Asian countries.

Despite setbacks along the way, this project is finally coming to closure, as TRP has made what management called monumental progress in achieving mechanical completion ahead of year-end 2023, making the project 100% complete with a C$14.5 billion cost to completion estimate. TRP has also taken steps to shore up its balance sheet as a result, with the recent sale of a 40% stake in Columbia Gas and Columbia Gulf for C$5.3 billion in cash, and it’s targeting another C$3 billion worth of asset sales to continue to improve its leverage profile.

Notably, TRP also placed $5 billion of other projects into service last year, including its Bruce Power Unit 6, which was completed within budget and ahead of schedule, and management’s latest guidance provides for full-year 2023 comparable EBITDA growth to be near or at 7%, signaling the value of its asset base.

Meanwhile, TRP’s full-year 2023 growth was supported by respectable results in the third quarter, with record gas transmission achieved in Canada and U.S. comparable EBITDA being up by 5% YoY. This was driven by modest 1.4% growth in US LNG deliveries, averaging 3.1 billion cubic feet per day, and by record new deliveries to power generators, reaching 5.2 Bcf on a single day during Q3.

At the same time, TRP is seeing robust growth in its Mexico natural gas pipelines, as demand is heating up in the region, with comparable EBITDA being up by 14% YoY during Q3 and near-full utilization of its Bruce Power and Alberta Power plants at 94% and 98% availability, respectively.

Looking ahead to Q4 results and beyond, TRP should see full year benefits from the C$5 billion worth of assets placed into service last year, as well as C$7 billion of new projects being placed into service this year, including Coastal GasLink, GTN Xpress, and the southern section of TRP’s Villa de Reyes pipeline in Mexico. Beyond 2024, TRP has an additional C$9 billion worth of projects including Southeast Gateway, as noted during the last conference call:

Looking to 2025, we expect to place $9 billion of assets into service and an average build multiple of approximately eight times. This includes our Southeast Gateway project in mid- 2025, expected to contribute approximately $800 million in incremental annual comparable EBITDA, along with an additional $3 billion of assets on our U.S. Natural gas pipelines business, some of which include Gillis Access Extension, Virginia Reliability, and Wisconsin Reliability projects.

Importantly, TRP carries a strong BBB+ credit rating from S&P, which was affirmed on the sale of Columbia Gas and Columbia Gulf. Moreover, 89% of TRP’s debt outstanding is held at fixed-rate with a very long average maturity of 18 years and an average interest rate of 5%. As shown below, TRP expects to achieve its target debt to EBITDA ratio of 4.75x through a combination of asset sales, growth in EBITDA from new projects placed into service.

Risks to TRP include its higher leverage compared to peers, even after it reaches its near-term target leverage ratio of 4.75x. While this is well-within range of peer Enbridge’s (ENB) target of 4.5x to 5x, it does sit above the low 3x of American peer Enterprise Products Partners (EPD). In addition, cost over-runs on 2024 and 2025 projects could require the need for additional capital recycling and push back the target leverage target. Lastly, TRP’s planned spin-off of its liquids pipelines adds near-term uncertainty around the financial profiles of the two separate entities.

Nonetheless, I view the liquids business as being an attractive one, considering that this segment saw a robust 8% YoY EBITDA growth in the first nine months of 2023, and the fact that auto companies like General Motors (GM) have recently changed course by recognizing the need for a more nuanced approach in vehicle design. This is reflected by GM’s recent announcement that it will reintroduce plug-in hybrids in a nod to consumers who don’t want to go full electric, and thereby furthering the runway for refined products as a fuel source for vehicles.

Importantly for income investors, TRP currently yields 7%, and the dividend is covered by an 88% payout ratio based on adjusted EPS. As shown below, this compares favorably to midstream peers, inclusive of Enbridge, Pembina Pipelines (PBA), Energy Transfer (ET), Enterprise Products Partners, Kinder Morgan (KMI), ONEOK (OKE), and Williams Companies (WMB).

Turning to valuation, I no longer view TRP as being the ‘Strong Buy’ it was back in July of last year. However, I continue to see value in TRP at the current price of $39.84 with a price to cash flow of 7.55, which sits on the low end of is 5-year range, as shown below. With a target 3-5% annual dividend growth outlook supported by cash flow growth and à 7% yield, TRP could deliver respectable total returns that match or beat the long-term 9-10% annual return of the S&P 500.

TRP’s P/CF valuation is also reasonable and on par with that of Enbridge and Enterprise Products Partners, while being pricier than that of Kinder Morgan and cheaper than Williams Companies. As such, TRP could be a good middle-of-the-road choice for those seeking to diversify their energy exposure with this energy giant.

Investor Takeaway

Overall, TC Energy remains a solid opportunity for income investors seeking steady cash flow growth and long-term total return potential. With a strong portfolio of assets, continued growth through new projects, and a solid 7% dividend yield supported by cash flows, TRP could be a good addition to those seeking diversification in the midstream energy space. Lastly, while TRP trades at a reasonable valuation, it’s not as cheap as it was since the last time I visited it. As such, I’m downgrading the stock from a ‘Strong Buy’ to a ‘Buy’ at the current price.