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Pipeline giant TransCanada (NYSE: TRP) is the type of company that could be a core holding for most investors. That said, because it is a Canadian company, many investors tend to overlook it. Here are three great reasons why you should not do the same.
1. As rock-solid as they come
Currently, more than 90% of TransCanada's earnings come from regulated assets or long-term contracts. The company is working to boost that number closer to 100% by building and buying additional fee-based assets while also planning to sell its U.S. Northeast power assets to reduce its exposure to the volatile merchant power markets. This focus on fees and regulated assets enables TransCanada to generate relatively stable income. That is certainly the case this year, with TransCanada's underlying earnings coming in at $2.9 billion through the first half, which is roughly flat year over year despite much weaker market conditions.
In addition to the company's stable cash flow, TransCanada's balance sheet is one of the strongest in the sector with an A rating. That rating enables it to finance growth easier and at a lower cost than rivals. This is proving to be a major competitive advantage during the downturn allowing the company to fund growth and maintain its dividend. Contrast this with rival Kinder Morgan (NYSE: KMI), which had to cut its dividend by 75% late last year to preserve its investment grade credit rating. At BBB-/Baa3, Kinder Morgan's rating is several notches below TransCanada, and at the last rung of investment grade, so it needed to act to protect its access to capital.
2. A steady stream of income growth
Speaking of the dividend, TransCanada currently yields a fairly generous 3.65%. While that is not as much as some other pipeline companies, it is better than Kinder Morgan's 2.3% yield. Further, TransCanada has a long history of increasing its payout.
Looking ahead, TransCanada expects to deliver 8% to 10% annual dividend growth through 2020. Driving that growth is an enormous pipeline of near-term growth projects currently in development as well as the company's recent acquisitions of Columbia Pipeline Group and Columbia Pipeline Partners (NYSE: CPPL), which it believes will support and may augment its ability to grow the dividend going forward.
3. Visible growth today and even more in the years to come
Driving TransCanada's ability to grow its dividend is a visible project backlog that currently totals more than $20 billion in assets that are expected to be in service by 2021. That is almost twice as much growth potential as Kinder Morgan given that its current backlog is now down to just $13.5 billion of projects through 2020. That said, as robust as TransCanada's near-term growth is, the company has an even larger pipeline beyond those projects.
The company is currently working on more than C$45 billion of commercially secured long-term projects, including four transformational pipelines projects:
- Energy East and the associated Eastern Mainline Expansion.
- Keystone XL.
- Prince Rupert Gas Transmission.
- Coastal GasLink.
The first two are multi-billion dollar projects to bring crude from the oil sands regions to market centers in eastern Canada and the U.S. That said, both projects are currently facing tremendous opposition from environmental groups and others, which could result in neither pipeline ever moving forward. Meanwhile, the other two projects would send shale gas from western Canada to proposed export facilities along the west coast. Given Canada's vast oil and gas resources and the current lack of market access, it is quite likely that TransCanada will eventually build at least one of these projects, which positions the company to deliver significant growth for investors over the next decade.
TransCanada has everything an investor could want in a long-term core stock holding: A low-risk business model, a compelling dividend, and visible growth. Those factors put the company in the position to fuel market-beating returns over the long-term.
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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.