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TransCanada: A Pipeline to Bigger Dividend Hikes?

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Given the enormous potential of its current projects, this stock is "trading at bargain-bin levels" says one analyst.

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Lots of companies raise their dividends, but few are as predictable as TransCanada (TRP).

For more than a decade, the pipeline operator and power producer has raised its dividend every January or February, and in each of the past six years the increase was exactly $0.02 a quarter, or $0.08 annually.

That includes the most recent bump on February 14, when the company raised its annual dividend to $1.76 from $1.68 - a jump of 4.8%.

The increases may seem rather puny in isolation, but they add up to some hefty gains for shareholders. TransCanada's dividend has shot up 120% since the dark days of 1999, when a failed diversification strategy prompted the company to sell off noncore assets and chop its dividend by nearly a third to save money.

Can TransCanada keep the dividend hikes coming? Analysts think so, given the company's recent track record and growth prospects.

What's more, with uncertainty surrounding the proposed Keystone XL pipeline project weighing on the shares and the stock trading at a reasonable 16 times estimated 2013 earnings, now may be a good entry point, they say.

"The stock is essentially trading at bargain-bin levels relative to the Canadian energy infrastructure universe...with an attractive 4.2% dividend yield," analyst Pierre Lacroix of Desjardins Securities said in a note.

Lacroix, who rates TransCanada a "buy" and has a 12-month price target of $46 (about 9% higher than Tuesday's close of $42.26), identified several catalysts that could drive the stock higher in the year ahead. They include a planned restart of units 1 and 2 at Bruce Power's A reactor in Ontario, and a long-term restructuring - possibly later this year - of tolls on TransCanada's underused Mainline natural gas pipeline.

But the biggest potential positive would be approval of Keystone XL.

The proposed $7.8 billion pipeline, which would deliver more than 800,000 barrels a day of bitumen from Alberta to US Gulf Coast refineries, is in limbo after the Obama administration rejected TransCanada's cross-border permit application, saying it did not have enough time to study it before a deadline imposed by the Republican-controlled Congress.

TransCanada remains upbeat on the project and aims to reapply for a permit after it finalizes plans on a new route that bypasses environmentally sensitive regions of Nebraska. The company still expects to receive the construction permit in the first quarter of 2013, after November's US presidential election, and is aiming for a startup of Keystone XL early in 2015.

"The state of Nebraska political and regulatory authorities are supportive of what we need to do. We'll work collaboratively to get it done. I don't have any reservations that this pipeline is going to get completed," Russ Girling, TransCanada's president and chief executive officer, said on the fourth-quarter conference call.

The United States imports about 10 million barrels of oil a day, much of it from Venezuela, Saudi Arabia, and Nigeria, and "we're just going to replace that oil with Canadian oil," Girling said.

Analysts are also optimistic that Keystone XL will get the go-ahead. Shippers remain committed to the project, and TransCanada is contemplating getting a jump-start on construction by proceeding first with the southern leg, from Cushing, Oklahoma, to the Texas Gulf Coast.

With Keystone XL not yet given the green light, however, TransCanada's stock trades only modestly above its five-year average price-to-earnings ratio, a level that "we believe fails to fully reflect the long-term EPS growth and organic expansion opportunities that will accrue once the Keystone XL project is completed in early 2015," UBS Securities analyst Chad Friess said in a note.

Contracted volumes alone are expected to add about $1 billion in EBITDA to TransCanada's results.

While shareholders (disclosure: I am one) wait for a resolution of Keystone XL, TransCanada's earnings and dividend growth will be sustained by the Bruce Power restarts, investments in the Alberta System gas pipeline, and potential "bolt-on" acquisitions, Friess said.

All of which suggests that TransCanada will be delivering dividend hikes for many years to come.

Editor's Note: This article was written by John Heinzl of Globe Investor.

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No positions in stocks mentioned.
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