Is TransCanada Corporation a Buy?

TransCanada (NYSE: TRP) has almost everything an investor could want in a stock. With a dividend yield of around 4.8%, the Canadian pipeline giant supplies investors with a lucrative income stream. Meanwhile, with 21 billion Canadian dollars ($16 billion) of expansion projects underway, the company has the fuel to grow earnings at a 10% compound annual rate through 2020, which should enable it to increase its dividend 8% to 10% per year through 2021. Finally, after selling off 11% this year, shares trade at an attractive value. Add everything up, and TransCanada has the potential to generate market-beating total returns in the coming years, which makes it an excellent stock to consider buying.

A rock-solid dividend

TransCanada has all the characteristics an investor would want to see in a high-yield dividend stock. The company generates very stable cash flow since predictable sources like long-term contracts and regulated assets supply 95% of its earnings. In the meantime, the company expects to make enough money to cover its dividend by a comfortable 1.6 times this year, which is a conservative level for a pipeline company. Finally, TransCanada has a strong balance sheet backed by an investment-grade credit rating and solid leverage metrics for a pipeline company. These factors put the company's dividend on a firm foundation.

Ample growth on the horizon

TransCanada's strong financial profile gives it the flexibility needed to fund the massive slate of growth projects it has in progress. Overall, the company anticipates completing CA$11 billion ($8.4 billion) in expansions by the end of this year, with another CA$10 billion ($7.6 billion) expected to come on line over the next few years. These growth projects should provide the company with enough fuel to expand earnings nearly 30% by 2020, which should support dividend growth toward the upper end of its 8% to 10% annual range through 2020 and by another 8% to 10% in 2021.

The company also has another CA$20 billion ($15.3 billion) of medium- and long-term projects in development, with increasing clarity on two of its large-scale expansions. After years of delay, TransCanada expects to start preliminary work on the $8 billion Keystone XL pipeline in the U.S. this fall, with full construction potentially starting up next year. That timeline positions TransCanada to finish the project by 2021. On top of that, the company could start work on the CA$4.8 billion ($3.7 billion) Coastal GasLink pipeline next year. By moving forward with these large-scale projects, it could help extend TransCanada's earnings and dividend growth outlook several years into the future.

A great business at a fair price

With TransCanada's stock falling by double digits this year, shares currently trade at around 13 times cash flow, which is an attractive level for a pipeline stock. While it's not as cheap as fellow pipeline peers Kinder Morgan and Enbridge, which sell for 8.8 times and 10.8 times cash flow, respectively, it's nowhere near as expensive as ONEOK and its premium valuation of 18.8 times cash flow. Overall, TransCanada trades at a fair price for a company that offers a rock-solid dividend that's expected to grow at a healthy rate for the next several years.

All the ingredients for a successful investment

TransCanada offers investors a compelling combination of growth and income for an attractive price. As a result, the company has the potential to generate double-digit total annual returns over the next few years, which makes it an ideal stock to buy for the long term.

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Matthew DiLallo owns shares of Enbridge and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.