More Growth in the Pipeline

06/02/2009 12:36 pm EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Natural gas transporter TransCanada isn't resting on its enviable yield, writes Gordon Pape in Internet Wealth Builder.

TransCanada (NYSE: TRP; TSX: TRP) boasts a stable business, low downside risk, and a long history of dividend payments. The Calgary-based company is best known for its vast oil and gas pipeline network, which extends for 59,000 kilometers (36,500 miles) across Canada and the US and draws from virtually all of North America's energy-producing basins. All told, the company delivers about 20% of natural gas consumed in North America.

But that's just part of the picture. TransCanada is one of the continent's largest providers of gas storage and related services, with approximately 370 billion cubic feet of storage capacity.

As well, the company owns, controls, or is developing approximately 10,900 megawatts of power generation. Apart from its conventional plants in Canada and the US, it is a partner in the Bruce Power nuclear generating station in Ontario and is also involved in wind power projects in Quebec and Maine. TransCanada says it has the capacity to power 11 million homes.

The company is also involved in two liquefied natural gas (LNG) projects with Shell (NYSE: RDS.A; LSE: RDSA) and Petro-Canada (NYSE: PCZ) aimed at eventually supplying up to 1.5 billion cubic feet of LNG per day to eastern Canada and the northeast US.

This is a company on the move, which is one of the reasons we like it. It is currently in the midst of a four-year C$19-billion expansion program, which includes the Keystone oil pipeline to the Gulf Coast, the North Central Corridor expansion, the Bruce Power refurbishment, and three large-scale, gas-fired power plants that will be coming on line over the next four years. This month, the company announced it has won the contract to build, own, and operate a 310-kilometer pipeline in Mexico to run from an LNG terminal in the Pacific coast port of Manzanillo to Guadalajara.

As these new projects come on stream they are expected to increase the company's profits, which in turn will result in higher dividends in future years.

Chief executive officer Hal Kvisle said TransCanada will have no trouble funding its ambitious 2009 capital program "as a result of our strong internally generated cash flow and our prudent decisions to maintain TransCanada's strong financial position and liquidity during these uncertain economic times."

I regard TransCanada as a top-class holding for investors. The shares pay a quarterly dividend of 38 cents (C$1.52 a year) for a yield of about 5%. [They were yielding 4.6% based on Monday's Toronto closing price of C$32.84—Editor.] That is an excellent return, and when you combine that with … the capital gains potential in the next few years, it makes TransCanada a compelling buy.

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