Is Transurban Group heading for a crash?

bear win

This morning road toll road operator Transurban Group (ASX: TCL) revealed traffic growth across the group was up 4.9% for the quarter ending September 30 2016. Overall, proportional toll revenue across the business increased an impressive 10.8% over the prior corresponding period to $529 million. This kind of double-digit revenue growth is usually reserved for hot tech companies not businesses operating semi-regulated infrastructure assets.

Transurban though is an exceptional business that’s monopoly like position has allowed it to grow revenues, earnings, and dividends at double-digit rates over recent years. For investors one of the key driver’s of its valuation is of course future dividend payments versus fixed or floating returns available elsewhere with varying degrees of risk.

The group is forecasting a dividend of 50.5 cents per security for the year ending June 30 2017, which places it on a pro forma dividend yield of 4.74% when selling for $10.65 per share. Despite the quality of the business model the stock still carries a lot of risk relative to other fixed-income investment classes and the yield is insufficiently high to compensate for Transurban’s risk profile in my opinion.

This is likely to become more apparent if cash rates in the US start to lift and some global governments’ unusual experiment with negative interest rates begins to reverse.

In a more normal interest rate environment investors would expect a yield more than 5.5% in compensation for the risks around buying shares in a business like Transurban. That would mean fair value for the shares is around $9 and it’s not unreasonable to forecast that they may track towards this level over the medium term.

Others to consider in the infrastructure and income space include gas transporter APA Group (ASX: APA), Qube Holdings Ltd (ASX: QUB) and Macquarie Atlas Roads Limited (ASX: MQA).

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

HOT OFF THE PRESSES: My #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.