TC Energy Is Still a Top Dividend Stock

Dividend investors can be a fickle group. Largely made up of defensive investors, they tend not to like change, especially when that change involves dividends.

This is why it was not surprising to see TC Energy (TSX:TRP) take a hit when it announced third-quarter earnings late last week. In my opinion, the sell-off was overdone, and I remain bullish on the company. (See Analysts’ Top Stocks on TipRanks)

TC Energy is one of the best midstream companies in North America. The company operates natural gas, oil, and power generation assets in Canada and the United States. TC Energy operates more than 60,000 miles of oil and gas pipelines, more than 650 billion cubic feet of natural gas storage, and about 4,200 megawatts of electric power.

As you can see, the company has significant scale, and on November 5, TC Energy reported third-quarter results.

Mixed Quarterly Results

While earnings of $0.99 per share were in line with estimates, EBITDA fell to C$2.2 billion and came in slightly below analysts’ consensus estimates for C$2.31 billion. As of writing, the company’s share price has dropped since earnings.

Negative headlines took center stage. The Coastal GasLink (CGL) pipeline project is suffering from headwinds. It is expected that the costs for the pipeline project will rise “significantly” and that completion is expected to be delayed.

Coastal GasLink to Be Delayed

For those invested in construction company Aecon Group (TSX:ARE), this news should come as no surprise. A few weeks ago, the company warned that the CGL project was at risk in its quarterly report. SA Energy Group, a partnership in which Aecon owns a 50% interest with partner RB Somerville, was awarded the CGL contract by TC Energy (formerly TransCanada) a few years ago.

Unfortunately, there is currently a dispute between RB Somerville and CGL around compensation related to project delays. Aecon subsequently warned that if their partner pulls out, it “may not be in a position to continue funding the project to completion.” Consequently, that “could result in a material impact to Aecon’s earnings, cash flow, and financial position if not resolved favorably in a timely manner.”

Aecon’s share price cratered on the news as investors await the outcome of current litigation.

Lower Dividend Growth

While this is undoubtedly wearing on TC Energy, the news that seemed to catch everyone’s attention was the change in the company’s dividend policy. Previously, the midstream company had a targeted dividend growth rate between 5-7%.

Unfortunately, the modified outlook now calls for dividend growth in the 3-5% range.

In order to judiciously fund our attractive suite of growth opportunities, maintain a strong financial position and enhance our already conservative, utility-like dividend payout ratios, we have modified our near-term dividend growth outlook,” continued Poirier. “We now expect to increase our common share dividend at an average annual rate of three to five per cent. 

François Poirier, TC Energy’s President and Chief Executive Officer

While dividend growth investors didn’t react well to the reduced target, putting the change into context is important.

First off, TC Energy already has an attractive starting yield of 5.67%. Secondly, the modification is not a result of poor performance or an inability to cover the dividend. In fact, the company did state that the “previous outlook remains affordable.”

Instead, the company believes that now is an appropriate time to accelerate growth and take advantage of current opportunities. Furthermore, reducing dividend growth targets will enable it to fund more of the upcoming CAPEX requirements with internally generated cash flow.

Dividend investors shouldn’t put too much emphasis on the reduced dividend target. TC Energy is taking the long-term view, and by capitalizing on opportunities in the near term, it can better position itself to deliver superior total returns.

TC Energy is still a company that provides an attractive yield and is still committed to growing the dividend.

Wall Street’s Take

Turning to Wall Street, TC Energy has a Moderate Buy consensus rating, based on five Buys, seven Holds, and one Sell assigned in the past three months. The average TC Energy price target of $70.24 implies 14% upside potential.

Disclosure: At the time of publication, Mat Litalien has no position in TC Energy (TRP).

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