Dividend Investing: TC Pipelines, LP (TCLP)

Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.

I should make it clear that I’m not recommending any of the stocks I write about. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.

Previously I highlighted telecom company CenturyTel (CTL) in this article, and have also covered Duke Energy (DUK) in this piece. In addition I did a piece on lesser-known Mercury General (MCY), which can be found here.

TC Pipelines, LP (TCLP) is a NASDAQ listed limited partnership formed by TransCanada Corporation and its subsidiaries to acquire, own and participate in the management of energy infrastructure businesses in North America. TC Pipelines earns revenue from the transportation of natural gas. Its investments are in the interstate natural gas pipeline systems that transport natural gas to a variety of markets in the United States, Eastern Canada and Mexico. The Partnership owns a 46.45% general partner interest in Great Lakes Gas Transmission Limited Partnership, with the remaining 53.55% interest in Great Lakes is held by TransCanada. It also owns a 50% general partner interest in Northern Border Pipeline Company., as well as a 100% interest in Tuscarora Gas Transmission Company. In July 2009, the Partnership acquired North Baja Pipeline, LLC from TransCanada.

At the current stock price of $38.83, the partnership is yielding 7.56%. This is up there amongst the highest financially sound dividends in the market. The partnership has a strategy of delivering stable, sustainable cash distributions to unit holders and finding opportunities to increase cash distributions while maintaining a low risk profile.

The partnership’s pipeline systems hold strategic market positions and, except for North Baja, comprise critical links for the transportation of natural gas from the Alberta Hub in Canada to U.S. markets. The Alberta Hub is one of the largest natural gas hubs in North America. Additional natural gas supply from the Alberta Hub is expected to be available in the future when new pipeline projects associated with the Montney and Horn River shale deposits in Western Canada are constructed, or if the longer-term potential associated with the proposed development of the Mackenzie Delta in Northern Canada and the North Slope in Alaska is realized.

On a valuation basis the partnership trades at a PE ratio of 16 times, and a price to sales ratio of 10.68 times. The PE ratio is below the industry average while the price to sales ratio is distorted due to the revenue model of the business. The price to book is 1.65 times and the cash flows are available at 15 times. The 32% total debt to total capital ratio is comfortably within industry norms. The quick ratio is low because the partnership does not carry any short-term assets, so it doesn’t reflect solvency accurately. Return on Equity is around about 10% which is pretty standard compared to peers.

The dividend has grown at about 5% per year since 2005. There growth or decline in the stock price is obviously highly correlated to the dividend as the company distributes on a sliding scale earnings generated by various underlying businesses. As such the stock price is unlikely to undergo large upside of downside swings, and aside from a panicked sell-off at the end of 2008, has traded in a relatively narrow range. As a result this may be a good piece of any dividend-seeking conservative investor’s portfolio.