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).
