Recently, TSI Dividend Advisor reported on TransCanada’s completed acquisition of U.S.-based Columbia Pipeline Group. Combined with other projects underway, Columbia’s operations have spurred the company’s revenue and earnings, and should give TransCanada more cash for dividends.
TRANSCANADA CORP. $61 (Toronto symbol TRP; Income-Growth Dividend Payer Portfolio, Utilities sector; Shares o/s: 860.7 million; Market cap: $52.5 billion; Price-to-sales ratio: 4.2; Divd. yield: 3.7%; Dividend Sustainability Rating: Highest; www.transcanada. com) operates a 90,300-kilometre pipeline network that pumps natural gas from Alberta to Eastern Canada and the U.S. Other operations include 4,250 kilometers of crude oil pipelines and 17 power plants.
Earlier this year, TransCanada raised its quarterly dividend by 8.7%, to $0.565 a share from $0.52. The new annual rate of $2.26 yields 3.7%. The company has now increased that payout each year since 2000. In addition, TransCanada has reintroduced a 2% discount for members of its dividend reinvestment plan (DRIP).
The company’s revenue rose 44.2%, from $7.8 billion in 2011 to $11.3 billion in 2015. Earnings fell 14.9%, from $2.22 a share (or a total of $1.6 billion) in 2011 to $1.89 a share (or $1.3 billion) in 2012. That was mainly due to lower gas pipeline revenue and power prices. Earnings then rebounded to $2.24 a share (or $1.6 billion) in 2013, and rose to $2.48 a share (or $1.8 billion) in 2015.
In July 2016, TransCanada completed its acquisition of Texas-based Columbia Pipeline Group for $13.0 billion U.S. The figure included $2.7 billion U.S. of Columbia’s debt.
Columbia operates natural gas pipelines in the U.S. Northeast, Midwest, Mid-Atlantic and Gulf Coast regions; it also operates underground gas storage terminals.
That acquisition helped TransCanada earn $626 million in the three months ended December 31, 2016. That’s up 72.4% from $453 million a year earlier. The company sold shares to help pay for Columbia. Due to more shares outstanding, earnings per share rose at a slower pace of 17.2%, to $0.75 from $0.64.
Those figures exclude the costs to integrate Columbia as well as other unusual items. On that basis, the latest earnings beat the consensus estimate of $0.72 a share.
Mainly due to the Columbia purchase, TransCanada’s revenue in the quarter rose 26.9%, to $3.6 billion from $2.85 billion a year earlier. That also beat the consensus forecast of $3.5 billion
The additional cash flow from Columbia also gives the company more room to raise its dividend. Starting with the April 2017 payment, TransCanada increases its quarterly dividend by 10.6%, to $0.625 a share from $0.565. The new annual rate of $2.50 yields a high 4.0%.
The company still plans to raise its annual rate by 8% to 10% each year through 2020.
The extra cash flow from its new operations will help TransCanada meet the goal to increase its annual dividend by 8% to 10% each year through 2020.
The addition of Columbia should increase TransCanada’s projected earnings per share from $2.64 in 2016 to $2.75 in 2017; that excludes unusual items. The stock trades at 22.2 times the 2017 forecast. While that may seem high, it’s still reasonable in light of TransCanada’s development spending, high-quality operations and rising dividend.
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