An Awesome Dividend Stock Priced at a Bargain

Here’s why TransCanada Corporation (TSX:TRP)(NYSE:TRP) may be a great buy today.

| More on:
The Motley Fool

TransCanada Corporation (TSX:TRP)(NYSE:TRP) stock has shaved off ~16% in the last 12 months. So, how does that make it an awesome stock to consider? Well, the A-grade energy infrastructure company is now cheaper and offers a juicier dividend yield.

stocks on sale

Is there really a buying opportunity in TransCanada right now?

At ~$53.20 per share, TransCanada trades at a price-to-earnings ratio (P/E) of ~17, while its long-term normal P/E is ~20, and its five-year normal P/E is ~21.7. Last year, the company increased its earnings per share by ~11%.

For the next three to five years, analysts estimate that TransCanada will grow its earnings per share by at least 7.3% per year.

TransCanada has been awarded an S&P credit rating of A-, so one might argue that the company should be worth a premium multiple. At worst, the stock is fairly valued.

However, the analyst consensus from Thomson Reuters thinks the dividend aristocrat is actually severely undervalued. It has a mean 12-month target of $69.30 per share on the stock, which represents an impressive upside potential of ~30%.

Is TransCanada’s dividend safe?

At the recent quotation, TransCanada offers a dividend yield of almost 5.2%, which is at the high end of its 10-year yield range. The payout ratio is estimated to be ~85% based on its adjusted earnings per share and ~62% based on its cash flow.

Both payout ratios are a little higher than they have been in the past few years, but not excessively so. Therefore, TransCanada’s dividend should be intact.

Moreover, TransCanada’s dividend-growth history is 17 years strong. Management last hiked the dividend by 10.4% in the first quarter. Through 2021, management aims to increase the company’s dividend by 8-10% per year.

How is TransCanada growing?

TransCanada has $23 billion of near-term growth projects and +$20 billion of medium- to long-term projects, which should add to the growth that’s experienced by its existing operations.

Investor takeaway

TransCanada is an A-grade company that employs a low-risk business model, which generates ~95% of its earnings before interest, taxes, depreciation, and amortization from regulated assets or long-term contracts. Thus, its operations generate stable cash flow.

Coupled with a sustainable payout ratio and a $43 billion capital plan to boost its growth, the company’s dividend should be intact. TransCanada offers a ~5.2% yield and should be able to grow its dividend by 8-10% per year through 2021.

Furthermore, the stock is currently attractively priced with analysts estimating upside of ~30% in the next 12 months. Altogether, the stock has ~35% total returns potential in the near term.

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 Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »