Although the news has been all about banks and semiconductors lately, there are a lot of great stocks perking along in the energy pipeline industry. One of my favorites this month is TC Pipelines (NASDAQ:TCLP), which is up 2% so far this year and also pays a 6.1% annual yield on its dividend.
Formed by its parent company, TransCanada, to manage pipeline assets, this highly profitable master limited partnership pulls in $182.7 million a year in revenue. It holds a 50% stake in two pipeline operations and is the whole owner of two others located throughout the U.S., Canada, and Mexico.
TCLP’s systems transports natural gas for several customers, including other natural gas pipelines, industrial companies, electric power generation companies, natural gas producers, and natural gas marketers. Last year, the U.S. relied on natural gas for 25% of its energy use. As the economy continues to rebound and use pushes higher, TCLP stands set to gain from the higher volumes — especially during these cold winter months.
Half of all American homes use natural gas as their main source of heat because it’s cheap and produces very few noxious emissions. It can run stoves, water heaters, dryers, and countless other appliances. Gas distillates are also used in the production of paper, glass, steel, and brick. Paint, plastic, film, and even some medicines use gas as a feedstock.
Because demand for natural gas is seasonal, with higher use in the winter and summer months, companies like TCLP store large quantities during the off-season. Utilities and industrial users that rely on immediate availability of gas when use picks up enter into contracts to ensure quick delivery. In this way, customers are satisfied their demands will be met — and TCLP can lock in business.
This same strategy is beneficial for controlling costs in a variable market. Since gas is shipped to areas that facilitate storage regardless of demand, TCLP can release and hold onto gas depending on favorable or unfavorable pricing conditions.
Success against competitors is based mainly on transportation speed, so having the best locations close to supply and customers is key. A source of strength for TCLP is its proximity to the Alberta Hub in Canada, one of the largest sources in North America and a critical link to the U.S. market.
Most master limited partnerships adjust their dividends down over time, but TCLP is one on a shrinking list of firms that have increased payouts over time — eight times since 2006, to be exact. It has never missed a payout, even during the credit crunch of 2008.
Observe in the chart above that it didn’t break down in 2008 until the last three months of the credit crisis after the collapse of Lehman Brothers blew up global lending patterns. If its business plan could survive that debacle with flying colors, it can probably survive anything.
A seasoned management team, led by Chief Executive Russell Girling, is responsible for assembling a workforce of 4,000 people. The average length of employee service at the Houston-based firm is more than 13 years, according to company reports, and the turnover rate has consistently been below 5%.
TCLP benefits directly from the acquisitions and assets of its founding firm. Since the company’s infrastructure is already in place, it pays for expenses using returns from their two joint ventures. The remaining two ventures that are wholly owned are sources of operating cash flows. These established assets require little maintenance and provide stability.
Analysts forecast TCLP will earn $2.78 a share in 2011, pricing the stock at 18.9x forward earnings. The firm should trade closer to the industry average of 20x, in my opinion. A history of beating estimates by an average of 15% suggests earnings will reach $2.95. Using this valuation, my model produces a $59 price target, up 12.5% from its current level. Add in the 5.8% dividend and it’s a great position for conservative investors. It’s a good buy.
For more insights like this, check out Jon Markman’s daily trading newsletter, Trader’s Advantage, and long-term investment letter, Strategic Advantage.
