Written by Puja Tayal at The Motley Fool Canada
TC Energy (TSX:TRP) stock dipped 13%, as the company announced the spinoff of its liquid pipeline business. The reaction was natural, as TC Energy has been facing several issues. From its Keystone XL pipeline leak in December 2022 to the overblown budget of its Coastal GasLink pipeline, its profits are stressed. TC Energy management has been reviewing options to sell $5 billion worth of assets and use the proceeds to reduce debt. The likely assets for sale were liquid pipelines as the company shifted its focus to natural gas pipelines.
Hence, when the spinoff came, it was unclear what it meant for shareholders. Will their dividend be affected?
Investors overreaction to TC Energy’s spinoff
The first reaction to news like that is a selloff. But the shareholders went overboard and pulled the stock price below its pandemic low. Is the spinoff that bad, or is it just an overreaction? The oil pipeline business is decelerating as the energy industry transitions to greener options. It is becoming increasingly difficult to build new oil pipelines. Hence, the existing ones are a valuable infrastructure that can generate cash flows for years.
As for natural gas pipelines, the Russia-Ukraine war has created a new opportunity for liquified natural gas (LNG) exports to Europe and Asia. Most pipeline stocks look to tap this opportunity and are accelerating spending on their gas pipeline projects.
What does spinoff mean to shareholders?
After two strategic reviews, TC Energy concluded that spinning off oil pipelines would unlock shareholder value. The two companies can focus on specific things without one stalling the other’s growth.
The oil business will have a debt of $8 billion. It will focus on improving the efficiency of oil pipelines and repaying $1 billion in debt over the three years after the spinoff. It will be a less capital-intensive business as there are no plans for building new oil pipelines but to use existing pipelines’ under-used portions. The company targets a 2-3% dividend growth from oil pipelines, which contributes 14% towards its dividend per share.
The majority (86%) dividend contributor remains the natural gas pipeline business. And with more projects in the pipeline, it can accelerate dividend growth as and when new pipelines start operations. Hence, the company expects a 3-5% dividend growth from the natural gas pipeline business.
While the oil business doesn’t look that attractive, the natural gas business does. I was bullish on TC Energy for its upcoming natural gas pipeline projects. The spinoff will remove the burden of the oil pipeline business from the gas pipeline business.
TC Energy vs. Enbridge
The spinoff makes strategic sense for TC Energy. However, investors seemed to get confused and think the other pipeline companies would follow suit and consider spinoffs. Rival Enbridge confirmed that it has no such plans. While Enbridge and TC Energy operate in the same industry and market, what is good for TC Energy may not always be good for Enbridge. Their fundamentals are different.
TC Energy can consider a spinoff, as liquid pipelines contribute only 11% of earnings before interest, taxes, depreciation, and amortization. But Enbridge relies heavily (more than 60%) on liquid pipelines. TC Energy’s spinoff will unlock value through 3-5% dividend growth from the current 3% growth.
The split still needs shareholder and regulatory approval. The transaction could take a year to complete. Until then, it will continue paying its $3.72 dividend per share.
Now is a good time to lock in a +7% yield by investing in TC Energy stock before it recovers from its low. You could also add Enbridge stock while it trades low. This way, you can diversify your portfolio into a bigger company like Enbridge and pure-play companies like TC Energy.
The post Should You Buy TC Energy Stock for its +7% Dividend Yield? appeared first on The Motley Fool Canada.
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