Friday, March 25, 2016

TransCanada Corp.

Sound bite for Twitter and StockTwits is: Price probably reasonable. One analyst I read said to wait until dividend is at least 5%. However, this stock was seldom there (only twice) over the past 10 years. That may not be very realistic. I prefer to buy when the price is reasonable, but below the median. It is there if you just look at dividend yield. The P/E Ratio just needs to be between 17.00 and 19.50 on a forward basis for the P/E Ratio to show that the stock is below the median. That would be a price around $49.45 which is very possible. See my spreadsheet on TransCanada Corp.

I own this stock of TransCanada Corp. (TSX-TRP, NYSE-TRP). I bought the stock in 2000 at an opportune time. The company had been cutting their dividend payments in order to re-organize and get the company into shape for long term profitability. This company's stock fell hard because of this. People who depend on dividends for their income can be an unforgiving lot, and get really upset at company when a trusted company cuts dividends.

The main reason for an earnings loss is that they took a hit with an asset impairment charge. Other expenses were also a bit higher than last year.

The dividend yield on this stock is good and the dividend growth is low. The current dividend yield is 4.52% based on dividends of $2.26 and a stock price of $49.98. The historical median dividend yield is 4.30% and the 5 year median dividend yield 3.94%. I think any dividend over 4% is good. The 5 and 10 year dividend growth is at 5.2% and 5.3%. I think any growth under 10% is low.

If you buy this stock at a reasonable price below the median, you are likely to have 25%, 50% and 100% of your purchase price paid for in 5, 10 and 15 years. Also, at such a price you are like to have a dividend yield of 5.5%, 7% or 10% after 5, 10 or 15 years. These can vary because the stock price can be rather high or rather low for years at a time.

For the stock I bought in 2000 I have a current dividend yield of 18.8% on my original purchase price after 15 years. This is the stock that I bought when the company had problems and had to cut dividends. For the stock I bought in 2006, after 9 years I am earning 6.8% dividend yield on my original stock cost.

This stock has not done well when you look at earnings. Even using the adjusted EPS (that is without the one-time asset impairment charge), which is $2.48, that just gives a total growth in EPS over the past 10 years of 0.4%. I have been collecting AFFO values over the past 4 years and the growth in AFFO is just 2.1% per year.

Analysts do not suggest that 2016 will be a great year either. They suggest that AFFO will go down by some 5% and EPS will be higher than the above adjusted EPS by only 2.4%. They expect a somewhat better performance in 2017 with EPS up by 12.2% and AFFO up by 16.5%.

On the plus side, dividends increased in 2016 by some 8.7%. Also, analysts expect that the Dividend Payout Ratio for 2016 will be around 89% for EPS and 47% for AFFO. If you bought this stock today at $49.98, in 5, 1 and 15 years you would be earning 5.8%, 7.5% or 9.7% in dividend yield on your original stock price if dividend continue to increase at 5.2% per year.

However, the company has said that they anticipate increasing their dividends between 8 and 10% in the future. If they increase them by 8.7% per year which is the increase for 2016, then if you bought this stock today at $49.98, in 5, 1 and 15 years you would be earning 6.9%, 10.4% or 15.8% in dividend yield on your original stock price.

The 5 year low, median and high median Price/Earnings per Share Ratios are 18.18, 19.58 and 20.99. The 10 year values are lower at 16.07, 17.67 and 19.54. The current P/E Ratio is 19.68 based on a stock price of $49.98 and 2016 EPS estimate of $2.54. This stock price testing suggests that the stock price is reasonable but above the median.

I get a Graham Price of $33.67. The 10 year low, median and high median Price/Graham Price Ratios are 1.15, 1.24 and 1.38. The current P/GP Ratio is 1.48 based on a stock price of 49.98. This stock price testing suggests that the stock price is expensive.

Where the price is showing up as reasonable and below the median is using the dividend yield. The current dividend yield is 4.52% based on dividends of $2.26 and a stock price of $49.98. Since the historical median dividend at 4.30% is some 5% lower, this stock price testing suggests that the stock price is reasonable and below the median.

When I look at analysts' recommendations, I find Buy and Hold recommendations. Most the recommendations are a Buy and the consensus would be a Buy recommendation. The 12 month stock price target is $55.73. This implies a total return of 16.03% with 4.52% from dividends and 11.50% from capital gains.

This article from Bloomberg News in the Financial Post talks about this company using J. P. Morgan to sell some of its assets to raise money for the Columbia Pipeline takeover. This article by Benjamin Sinclair of Motley Fools gives three reasons why TransCanada is buying Columbia Pipeline. Jean Anderson at the Los Angeles Mirror talks about institutional buying of this company.

I will have only one entry for this stock this year. However, I did a more complete report on this company in 2015 and you can see those reports here andhere.

The last stock I wrote about was TransAlta Corp. (TSX-TA, NSYE-TAC)... learn more. The next stock I will write about is AltaGas Ltd (TSX-ALA, OTC-ATGFF)... learn more on Wednesday, March 30, 2016 around 5 pm. I am taking Easter Monday off as I never had a chance to take it off when I was working. Also on each Easter Monday I had to find a babysitter for my child. All working parents can relate to that.

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 Corp.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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