Transurban Group (ASX: TCL) develops, operates and maintains toll roads in Australia and the US. It has to borrow a lot of money to build, buy, or bid for the rights to toll roads because of the great expenditures of these kinds of projects. Then, it must successfully manage costs along the way over future decades to make sure what it brings in is more than what it pays out.
This is an infrastructure company that has a monopoly over its roads by way of its agreements and licencing, and no new competitor is just going to come a long a build a toll road next to Transurban's to compete. What are critical to get right are initial expenditures, running costs and cash flows.
Transurban has toll roads in Sydney and Melbourne, and two in Virginia, USA, although 98% of its revenue is generated in Australia.
In its 2013 annual report released this month, revenue increased 3.5% to $1.19 billion, and net profit after tax leaped 198.1% to $174.5 million. This was largely due to the company having to take a $137 million write-down on investments last year.
According to the report, free cash flow is the primary measure used to assess cash generation in the group. It represents the cash available for distribution to security holders, and is a key measure of the performance of Transurban's operating assets.
Over the past five years, free cash flow has swung from as low as -$209.6 million (2011) to $329 million (2013), but has been positive four of those five years. Despite the fluctuation, the dividends have been very high compared to earnings per share, sometimes double or triple the earnings per share, but this is slowly coming into line with each other as earnings become larger and larger. The company wanted to establish a stable dividend income stream to attract investors.
In good years, the net profit margin has been around 15%, but the average has been about 10%, which is acceptable. Return on equity has been a low 3%-5% recently, so no stellar returns here. By the nature of its assets, it is more about long-term capital appreciation and a steady dividend along the way, like bank savings interest. Investment and pension funds love this kind of business.
Foolish takeaway
This is the kind of stocks that won't excite you, but hopefully will pay for your future with compounded interest over the long run. It's not a sure winner, though. You still must review it periodically to see if the company is growing and offering the returns that originally attracted you.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
