TC Energy: An Excellent High Yield Ignored By The Market

Many baby boomers are ill-equipped for retirement, as indicated in a recent survey by Fortune Magazine. Who can blame them? As financial education is mostly self-taught and not covered in schools.

Schools are there to teach you how to be an employee, not how to become financially independent one day. That's why it's up to each and every individual investor to see the light and learn how to become passive income investors.

This starts by picking a basket of high quality dividend stocks that have stood the test of time. This brings me to TC Energy (NYSE:TRP), which currently trades well under its 52-week high and a 6.6% yield. Let's explore why TRP may be a great choice at present for long-term income and growth.

Why TRP?

TC Energy is a leading energy infrastructure company operating pipelines, storage, and power generating assets in Canada, U.S., and Mexico. It has over 60K miles of oil and natural gas pipelines, more than 650 BcF of natural gas storage, and generates 4,200 MW of electric power.

TRP has a strong presence in the bitumen-rich Athabasca oil sands of the province of Alberta, Canada. Beyond that, TC also has presence in the gas-rich Marcellus and Utica shale basins in Appalachia, and its pipelines also carry gas to the U.S. Gulf Coast for export. This mission critical and moat-worthy collection of assets have enabled TC to deliver annual dividend growth for its shareholders for more than 2 decades.

TRP recently capped off a strong 2022, with comparable EBITDA growing by 6% YoY to $9.9 billion. This was driven by strong natural gas demand, as volumes grew by 5% YoY for the full year. This was capped off by a record delivery of 36.6 BcF of natural gas near the end of last year, on December 23rd.

Moreover, TRP is making good headway in the LNG business, as its share of U.S. feed gas deliveries grew from 25% to 30% last year, with management aiming to increase share to 35% over the next 5 years. The LNG business appears to be attractive considering its capacity for seaborne transport to Europe, which has faced natural gas supply disruptions from Russia. In fact, European countries including the UK imported 121 million tons of LNG last year, up 60% from 2021.

Looking ahead, TRP could see meaningful growth from its Coastal GasLink project. This project would carry natural gas across British Columbia from the Western Canadian Sedimentary Basin at Dawson Creek to the Canadian west coast, where it can be converted into LNG for export, opening up new markets for natural gas in Asia. This project is ahead of schedule with a high completion rate thus far. Management noted this and other capital deployments during the recent conference call:

The Coastal Gaslink project has now reached 84% overall progress, and we have line of sight to our mechanical completion target of year-end 2023. While we have faced significant challenges, our teams in the field are working tirelessly to complete the project in the highest safety and quality standards in the pipeline industry while executing the remaining scope at the lowest possible cost.

We sanctioned $8.8 billion of projects that are expected to generate a weighted average unlevered after-tax IRR that is above our historical range. While we expect to sanction additional high-quality opportunities, novel projects sanctioned will have significant capital requirements over the next few years.

Meanwhile, TRP carries a BBB+ rated balance sheet with an expected net debt to EBITDA ratio of 5x by the end of this year. While this is somewhat higher than the preferred 4.5x level for midstream companies, it's not unreasonable considering the number of projects currently in pipeline. Management has also targeted bringing down the leverage to 4.75x in the near term after reaching 5x.

Importantly, TRP has raised its dividend for 23 consecutive years, including the recent 3.3% increase this year. The dividend also appears to be well-covered, with the new rate being 53% of its 2022 operating cash flows.

I also see value in TRP at the current price of $41.33 with a 6.6% TTM dividend yield. It also currently trades at a price to cash flow ratio of 8.9x, sitting at the low end of its recent range and below that of peer Enbridge (ENB), as shown below.

Morningstar has a fair value estimate of $47 and analysts have a more conservative price target of $41.55. Even with the more conservative price target, TRP could be expected to deliver at least market performance, with its 6.6% dividend yield and 3 to 5% long-term annual EBITDA growth.

Investor Takeaway

TC Energy is a strong Canadian midstream player with a long history of dividend growth. It's seeing strong demand for natural gas products, and could see continued growth in LNG through heightened global demand.

Moreover, it has a strong pipeline of projects that should meaningfully contribute to top and bottom line results down the line. As such, I find TRP to be an attractive energy stock to own at present, while it's trading at an attractive price with a high dividend yield.

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