TC Energy Stock: A Great 6% Yield From This Energy Giant (NYSE:TRP)

Large, well-established pipeline companies are well-known for providing investors with utility-like stability while giving higher dividend yields. That’s because they have contracted cash flows based on take or pay model, tied to some of the most prolific oil and gas producing regions in North America.

This brings me to TC Energy (NYSE:TRP), which like its better known peer Enbridge (ENB), is a Canadian giant in the midstream space that delivers stable and growing returns for its shareholders. This article highlights what makes TRP a solid pick for high income at present, so let’s get started.

Why TRP?

TC Energy operates pipelines, storage, and power generating assets in both Canada and the U.S. It has more than 60K miles of oil and natural gas pipelines, more than 650B cubic feet of natural gas storage, and generates 4,200 MW of electric power.

TC has a strong presence in the bitumen-rich Athabasca oil sands of the province of Alberta, Canada. Beyond that, TC also has presence in the gas-rich Marcellus and Utica shale basins in Appalachia, and its pipelines also carry gas to the U.S. Gulf Coast for export. This has enabled TC to deliver annual dividend growth for its shareholders for over 2 decades.

TC is benefiting from heightened global demand for natural gas products, with unrest in Europe being a key driver. This is reflected by its continued allocation of around a quarter of volumes destined for export from U.S. LNG facilities through TC’s U.S. natural gas pipelines. Its total natural gas transmission lines averaged 12.8 billion cubic feet per day during the second quarter, up 9% compared to the prior year period, and its natural gas pipelines averaged 25.4 Bcf/d, up 3% YoY.

Despite these positive results, TC’s stock has seen material weakness in recent months, falling in sympathy with the rest of the market. At the current price of $46.99, TC trades well below its 52-week high of $59.37 achieved as recently as June of this year, as shown below.

I see the decline as being unwarranted, considering TC’s focus is on the growing natural gas segment (while Enbridge is largely focused on oil assets), targeting 5% annual earnings growth with over 95% of its earnings tied to highly regulated or contracted cash flows. Moreover, TC has promising forward growth potential in Mexico, benefits of which are noted by Morningstar in its recent analyst report:

TC Energy has announced a wide-ranging and attractive partnership with Mexico’s state-owned utility, Comision Federal de Electricidad. The agreement resolves existing arbitration relating to multiple Mexican projects with the creation of a 30-year service agreement for all Mexican assets stretching out to 2055. It also introduces a new $4.5 billion pipeline at a very attractive multiple that will be included in the new service agreement and encourages CFE to work to address regulatory and community stakeholder issues by providing it with an equity stake in the partnership’s assets.

To fund the pipeline, TC Energy is issuing CAD 1.8 billion of shares at CAD 63.50 each, though with an allotment option, the issuance could be up to CAD 2 billion. We think the benefits (long-term contracts and attractive investment multiples) more than outweigh the minimal dilution compared with our CAD 68 fair value estimate, which we expect to leave unchanged. Our narrow moat rating is also unchanged.

Risks to TC Energy include potential for carbon emissions taxes in Canada, which may make transporting natural gas more expensive. However, management is positioning the company for an increasingly climate-conscious future by pursuing projects that could transport more than 20 million tons of carbon dioxide, and aims to reduce emissions by 30% by 2030, with the aim of reaching net zero by 2050.

Meanwhile, TRP maintains a respectable BBB+ rated balance sheet. While its debt to EBITDA ratio of 4.75x is elevated compared to peers, I find it to be reasonable considering its aforementioned development projects as well as its Coastal Gaslink project, which is now 70% complete with potential future volumes up to 5 Bcf/d.

Also encouraging, management reiterated its commitment to dividend growth, targeting 3% to 5% annual growth from now through 2026. The C$11 billion in annual dividends is well covered by internally generated cash flow of C$21 billion, and management expects to balance the dividend with capital growth projects.

Lastly, I find the recent drop in price to $46.99 with EV/EBITDA of 13.3 to be attractive. As shown below, it sits towards the low end of TRP’s trading range over the trailing 3-year period. Morningstar has a $53 fair value estimate, and sell side analysts have an average price target of $48.33. As such, I find the current price as presenting a good entry point, since the utility-like business model of TRP means that it probably won’t trade at a material discount to fair value outside of a black swan event.

Investor Takeaway

In conclusion, I believe that TC Energy presents a good opportunity at the current price. While the company faces some risks, such as potential carbon taxes, it is diversified across multiple markets including Mexico, and has carbon transport opportunities. Meanwhile, its current business is demonstrating respectable growth. With a 6% dividend yield, TRP is set up for potentially rewarding long-term returns.