An Awesome Dividend Stock Priced at a Bargain

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

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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.

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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.

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