Friday, September 24, 2010

TransCanada Corp

I own this stock (TSX-TRP). I first bought this stock in February 2000, and purchased more in 2006. To date, I have made a total return on this stock of 11.6% per year. They on the dividend lists that I follow of Dividend Achievers and Dividend Aristocrats (see indices). This is the sort of stock you want to buy when starting a portfolio, see Setting Up A portfolio.

This is great utility stock. The total return over the last 5 years has not been as good as my average yearly return as we are in recession. The dividend portion of the return averages between 4 and 5%. The 5 year average dividend yield is 3.9% and this is a good yield. I have just been reading a review of a book called “The Little Book of Big Dividends”. One thing the author says is that you should look at what a stock will be paying you in 5or 10 years time. This is the dividend growth potential of a stock.

This book is by Charles B. Carlson. Read about him at Carlson. Unfortunately, I was reading this review in a newspaper and I cannot find the same review on line. There is a good review of this book at Amazon. Unfortunately, this review does not cover dividend growth potential of a stock, but the reviewer still makes some good points on investing in dividend paying stock.

Now, let’s get back to dividend growth potential. For this stock, the current yield on the stock price of $38.16 is 4.2%. If we assume that the dividends will grow the same as they have for the past 5 years that is at a compound rate of 5.3% then the dividend yield would be 5.5% in 5 years and 7% in 10 years. According to the review, Carlson says you should look at a stock’s dividend growth potential as well as the current size of the stock’s dividend yield.

The reason to buy utility stocks is that they tend to hold their value. They will not soar with the market, nor will they lose as much. We are in a recession, so you will not find good growth rates in revenue, or in earnings and cash flows. Utilities tend to payout a reasonable portion of their cash flow, which this stock is doing. The best growth rates are in book value and for the last 5 and 10 years, this has grown 11 and 8.3% per year.

Utilities tend to have lots of debt because of acquisitions and capital expenditures. This is normal with utilities. You will always want to look to see if they have any problems rolling over their debt. The Liquidity ratio is seldom great on utility stock, as it is in this case, which is at 0.64. The Asset/Liability Ratio is much better at 1.63.

The current 5 year average Return on Equity is 10.5% and this is a good figures. It has been coming down recently. The ROE at the end of 2009 was 8.7%. For the first 2 quarters of 2010, it is lower at 7.2%. However, you would expect this to come down in a recession.

I will continue to hold this stock and track it. On Monday, I will look and see what analysts say about it.

TransCanada is a leader in energy infrastructure. Their network of pipeline taps into virtually all major gas supply basins in North America. TransCanada is one of the continent’s largest providers of gas storage and related services. It is a growing independent power producer. Its web site is here TransCanada. See my spreadsheet at trp.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. I own it as well Susan, I'm a big fan of TRP.

    Cheers!

    ReplyDelete