Joe Gemino: With its 4-star rating and narrow moat, TransCanada is one of our best picks in the energy sector. The stock offers 25% upside and an attractive 5% dividend yield. We think that the market continues to overlook the positive impact the growth portfolio will have on future cash flows and the balance sheet, while it places too much emphasis on less important outside factors. The time is right for long-term investors to capitalize on the stock's considerable upside while collecting a steady stream of growing income.
The FERC's proposal that disallows tax recovery from U.S. pipelines that operate under a cost of service contract sent the stock into a downward trajectory. However, we think that the market is overestimating its impact on TransCanada's operations. Currently, the regulations affect only 13% of the company's EBITDA, which we expect it to fall to 8% in the next five years, owing to unaffected growth projects.
Additionally, we expect a healthy pipeline of growth opportunities to drive TransCanada to meet its targeted 8% to 10% annual dividend growth over the next three years. TransCanada boasts 32 billion Canadian in commercially secured capital projects in its growth portfolio, highlighted by the Keystone XL. The widening of the heavy oil discount has given some investors pause as it makes production growth more difficult. But the widening heavy oil discount only shows that new pipelines are needed now more than ever, making TransCanada a good opportunity for investors.