Is TC Energy Stock a Buy for Its 7.7% Dividend?

One of the most popular dividend stocks on the TSX is TC Energy (TSX:TRP). Valued at a market cap of $51.6 billion, TC Energy is among the largest companies in Canada and transports 25% of the gas required in North America.

With $125 billion in total assets, TC Energy stock has returned 11% annually to shareholders, showcasing the resiliency of its business model and cash flows. Despite its outsized gains, TC Energy stock offers shareholders a tasty dividend yield of 7.7% given it pays shareholders an annual dividend of $3.84 per share.

Let’s see if you should buy TC Energy stock at its current valuation.

TC Energy stock is down 35% from all-time highs

In the last two years, capital-intensive companies such as TC Energy have trailed the broader markets by a wide margin as higher interest rates have narrowed profit margins and cash flows, driving stock valuations lower for companies part of sectors such as energy, utilities, real estate, and industrials.

TC Energy aims to end 2024 with a debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) of 4.8 times. In the last 12 months, it has made significant progress in reducing leverage by completing the sale of its equity interest in Columbia Gas and Columbia Gulf for $5.3 billion in total proceeds. It has also identified capital rotation opportunities totaling $3 billion that might be completed by the end of 2024.

Lower interest payouts will allow TC Energy to reinvest in growth projects and further reduce balance sheet debt, both of which should drive future cash flows higher.

In 2023, it placed $5.3 billion of projects in service, including expansion projects, on its NGTL System. TC Energy emphasized it would continue to develop projects within its secured capital program with $7 billion of assets expected to be placed in service this year.

Moreover, the TSX heavyweight has allocated between $6 billion to $7 billion towards capital expenditures in 2024, allowing it to grow dividends between 3% and 5% going forward.

In the last 12 months, TC Energy’s free cash flow per share has totaled $6.59. Comparatively, it has paid shareholders $3.72 per share in dividends, indicating a payout ratio of less than 60%, which is quite sustainable.

All eyes on the upcoming spin-off

Last year, TC Energy revealed plans to split the company into two separate entities. Its liquids pipeline operations will soon be a separate publicly traded company called South Bow, which will operate 3,000 miles of oil pipelines across the U.S. and Canada. Post the spinoff, TC Energy will be a natural gas pipeline and energy solutions company.

TC Energy confirmed the two companies will maintain the current dividend payout. As mentioned earlier, TC Energy aims to grow dividends between 3% and 5% each year, which is slower than earnings growth. So, the company wants to retain cash to fund capital projects and de-lever the balance sheet, improving its payout ratio to 50% by 2026.

Priced at 12 times forward earnings, TC Energy trades at a 10% discount to consensus price target estimates. After accounting for dividends, the TSX dividend stock should return 18% to shareholders in the next 12 months, making it attractive to value and income investors.