TransCanada Corporation Shareholders: Brace Yourself for Modest Returns After the Keystone XL Rejection

With the U.S. Department of State denying TransCanada Corporation (TSX:TRP)(NYSE:TRP) a permit for Keystone XL, shareholders may need to temper their return expectations.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What happened on November 6 may not have been a surprise for TransCanada Corporation (TSX:TRP)(NYSE:TRP) shareholders. After eight long years, President Obama rejected the Keystone XL Presidential Permit and stated that the pipeline did not serve the national interest.

The question TransCanada shareholders are likely asking is, What does this mean for the company’s long-term returns? After President Obama vetoed a bill to build Keystone XL earlier this year, many would argue that TransCanada shares have already priced in a rejection of Keystone, and they would likely be right.

While shares did plunge about 6% on the news of President Obama’s decision, further downside is unlikely. However, the decision could very well have an effect on the long-term returns of the company, and shareholders should temper their long-term growth expectations. Here’s why.

1) TransCanada is much less undervalued

The main growth driver for TransCanada is its $46 billion capital growth program, which extends out to 2020. This growth program is basically divided into two parts—$12 billion in small- to medium-sized projects, which are expected to be in service before 2017, and $34 billion of large-scale projects, which are expected to be in service around 2020.

The problem for TransCanada is the bulk of its growth program (the $34 billion) is uncertain and dependent on approvals by regulatory authorities. These projects would contribute substantially to TransCanada’s earnings growth over the next several years.

The company expects its $12 billion in small- to medium-sized projects to drive a earnings before income, taxes, depreciation and amortization compound annual growth rate (CAGR) of about 8% between 2013-2017. If the other $34 billion of projects are approved, growth would jump up to a 16% CAGR between 2017 and 2020.

Keystone XL comprised about $8-10 billion of that $34 billion, and with Keystone out of the question for now, the company can expect lower growth between now and 2020. TransCanada is currently trading a forward price-to-earnings ratio of about 16.5 (below the group average of 22), and the rejection of Keystone reduces TransCanada’s odds of trading in line with its peer group. TransCanada’s peers have higher growth rates; Enbridge, for example, is expecting a 11-13% five-year CAGR.

Analysts at RBC estimate that Keystone was worth about $4 per share, and the rejection means less upside for TransCanada.

2) TransCanada could see lower dividend growth

TransCanada is currently planning to grow its dividend by a CAGR of 8-10% through 2017. TransCanada’s CEO has stated that a potentially higher rate of dividend growth is dependent on the approval of major growth projects.

Once TransCanada has better visibility of higher earnings and cash flows from the approval of some or all of their projects, management would be more comfortable boosting the dividend-growth rate. With Keystone out of the picture for now, the company may be less likely to consider a boost in dividend growth due to lower long-term earnings growth.

In addition, the company still has other significant projects to fund, and since part of these are being funded through cash flow, this may add to the company’s reluctance to increase the payout ratio because it could jeopardize the financing of these projects.

Since a high payout ratio leads to a higher valuation, and because TransCanada currently pays out less than its peers, an inability to boost dividend growth could weigh on shares.

3) The Keystone rejection could add more uncertainty to TransCanada

The rejection of Keystone can also serve to embolden climate change activists and people who oppose pipelines, since it would be the first pipeline to be rejected partially due to climate change reasons. This could add to overall pessimism around the pipeline sector.

In addition, there are also questions about the actual economic need for export pipelines like Keystone because low oil prices have kept production down. Some experts have said only one or two of the proposed export pipelines will be necessary, which also limits TransCanada’s growth.

Should you invest $1,000 in TC Pipelines right now?

Before you buy stock in TC Pipelines, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and TC Pipelines wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Mancini has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A worker overlooks an oil refinery plant.
Dividend Stocks

3 High-Yield Canadian Stocks I’d Consider for a $5,000 Investment

These three dividend stocks are excellent additions to your portfolio, given their healthy cash flows and high yields.

Read more »

chart reflected in eyeglass lenses
Investing

3 No-Brainer Canadian Stocks to Buy Under $50

Given their solid underlying business and healthy growth prospects, these three under-$50 stocks would be excellent buys right now.

Read more »

canadian energy oil
Energy Stocks

How I’d Position $7,000 in This Canadian Energy Stock for 2025 Growth Potential

Tourmaline, Canada's low-cost and largest natural gas producer, is benefiting from strong industry fundamentals.

Read more »

Oil industry worker works in oilfield
Stock Market

3 Undervalued Canadian Stocks I’d Buy and Hold for Decades

Investing in quality undervalued stocks such as Martinrea and Cascades should help you generate outsized gains in 2025 and beyond.

Read more »

nuclear power plant
Energy Stocks

1 Magnificent Canadian Stock Down 40% to Buy and Hold Forever

This energy stock may be down, but do not count it out if you're looking for long-term income.

Read more »

A plant grows from coins.
Energy Stocks

Where I’d Put $15,000 in Top Energy Stocks for Income and Appreciation

The recent pullback in energy stocks presents a compelling opportunity for long-term investors to generate capital gains and dividend income.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How I’d Use My TFSA to Invest in Canadian Value Stocks for Long-Term Wealth

TFSA investors can mitigate bearish trends by shifting to value stocks that can deliver long-term wealth.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA ‘Forever Holdings’: 4 Canadian Stocks for Sustained Tax-Free Growth

Add these four TSX dividend stocks to your self-directed TFSA portfolio to generate tax-free passive income for decades.

Read more »