TC Energy (TSX:TRP), the operator of Keystone Pipeline, announced a spin-off of its low-growth liquid pipelines business. The initial reaction of shareholders is bearish, sending the stock down 13% to a new low. Is the stock a buy, sell, or hold as the company spins off?
The rationale behind the spin-off
There is no denying that the road has been tough for TC Energy with cost overruns of its Coastal GasLink project and several oil leaks at Keystone Pipeline. And with the energy industry switching to low carbon, building new oil pipelines will become even more difficult. The oil business is decelerating, while the liquified natural gas (LNG) business is accelerating as North America becomes the biggest LNG exporter.
After a two-year strategic review, the management concluded that splitting its natural gas and oil pipeline business can unlock value for shareholders. Here’s how.
Having a low- and high-growth business in the same company is restricting growth. By splitting the two, TC Energy can focus on low-carbon gas, nuclear, and renewable energy. It has significant investment opportunities to build new gas pipelines and participate in North America’s LNG export opportunity.
The liquid pipeline company can focus on increasing capacity on underused portions of oil pipelines and adding new delivery points. It won’t have a high capital requirement as it will maintain existing oil pipelines.
The spin-off is subject to shareholder approval and is expected to be completed in the second half of 2024.
Should you buy, hold, or sell TC Energy stock?
TC Energy offers $3.72 dividend per share, of which 86% comes from natural gas and 14% from the oil business. Post-spin-off, TC Energy could continue growing its dividend by 3-5% as it builds more gas pipelines, which will bring in more cash flow.
The liquid pipeline company could grow its dividend by 2-3% by improving the operating efficiency and squeezing out maximum cash from existing infrastructure.
Most shareholders buy and hold TC Energy stock for its regular growing dividends. But the spin-off news has altered the course of their income portfolio. Shareholders are worried about whether they can continue getting a $3.72 dividend per share and their dividend will grow with inflation.
The company’s management is striving to maintain dividend growth. Hence, they used a $5 billion asset divestiture to reduce balance sheet debt. The liquid pipeline company will carry lower debt to help it sustain its contribution to dividends.
Who should buy TC Energy stock?
Now is a perfect time to grab this high dividend stock as investors are selling it over fears of a dividend cut. Until the spin-off in 2024, the management will at least maintain the $3.72 dividend per share. Which means you can earn a 7.8% yield for 2024. The spin-off will give you shares of TC Energy and the new company.
Post-spin-off, you can sell the liquefied company’s shares if the dividend yield is not in sync with your expected yield. You can continue holding the gas pipeline stock and benefit from LNG growth.
Who should hold TC Energy stock?
If you purchased the stock closer to its high, you can add more TC Energy shares and reduce your average cost per share. This could give you a higher dividend. And if the stock rises as the spin-off synergies are realized, you can sell some. There is no point selling a good income-generating stock at its 52-week low.
It’s not like the world has changed for TC Energy. The company dared to make the difficult decision of a spin-off to stay in sync with the changing energy industry. It would also reduce the high cyclicality of the stock that comes with oil prices.
If you already own the stock, it is better to keep holding it and earn the $3.72 annual dividend. And if you decide to sell the stock, wait for the market to price in the spin-off synergies and sell it at or above $55.
