One of the major perks of being a value investor in dividend payers is the ability to score a higher yield at a lower price. Indeed, the lower the shares fall without a dividend reduction, the more the yield stands to swell.
And while not every fast-falling dividend play with a yield marching higher is a trap just waiting to punish falling-knife catchers, I do think that extra caution on the part of buyers is more than warranted, especially if we’re talking about a company that’s either mismanaged or operating in an industry that’s facing harsh, mounting headwinds.
Of course, the telecom industry ought to come to mind when thinking of the brutal industry environment. We’ve seen the big players lower their dividends by more than half in recent years. And there’s concern that the erosion in share value isn’t quite over yet, as a new slate of disruptive forces looks to approach.
In this piece, we’ll focus on a modest 4.3%-yielding pipeline firm that I think is as strong as ever, especially when you look past nearer-term pressures for the longer-term growth opportunity to be had.
TC Energy
Enter those recently cooled shares of pipeline firm TC Energy (TSX: TRP), which have been on a downtrend alongside the rest of the midstream energy plays of late. Indeed, the capital-intensive nature of the business of pipelines makes rate hikes such a dreaded thing, especially with expansion at top of mind amid the rise of AI data centres across the continent.
With the Fed (Federal Reserve in the U.S.) recently raising interest rates, there are higher hopes for a rate hike on this side of the border, even as the Bank of Canada (BoC) considers its own slate of objectives and challenges unique to the Canadian economy.
Any way you look at it, higher rates are not great news for TC Energy, but it’s no gut-punch. For buyers looking to step in here, you’ll get a slightly richer yield to go with the same long-term narrative (think AI-driven demand for natural gas) that, in my view, is a much bigger mover of the needle. And, it’s a narrative that once commanded a much fatter premium more than a month ago!
Buy the dips
While it’s hard to buy dips after explosive multi-year runs (believe it or not, shares of TRP are still up over 40% in the past two years), I’m more inclined to view the latest 15.6% dive as a much-needed correction in a name that was starting to go parabolic for the Spring.
Whether we’re talking about the “generational” boom in natural gas to come, as I remarked in a previous piece, or the excessive pessimism surrounding the impact of rate increases for a firm that has a good amount of debt sitting on the balance sheet, there are a lot of forces in play that stand to move shares in either direction.
The near-term road looks quite choppy, but, beyond that, I do think that TRP stock stands out as a dividend staple to buy and stash away.
The bottom line
Nothing major has changed about the AI boom in recent weeks, perhaps other than more excitement with the reveal of major agentic AI technologies (think Meta Platforms‘ Muse or OpenAI’s Dots), which could add more heat to the AI infrastructure buildout and, with that, demand for more energy and strain on the grid.
With a strong capital program in place and a fairly predictable and growthy couple of years ahead, I find the mostly rate-driven decline is overdone at this point.
At 23.7 times trailing price-to-earnings (P/E), you might not be getting a big steal with TC Energy, but you are getting a nice dividend and some decent dividend growth over time (though the rate has dragged a bit of late). With a multi-decade dividend growth streak and a relatively flat dividend growth streak in recent years that, in my view, could accelerate as debt erodes and rates look to come in again, I’d not sleep on the name.