Transurban Group (ASX: TCL) has seen its share price jump 15% so far this year to trade at around $12.00 as investors go hunting for yield.
The toll road operator has been bid up so high now, at current prices, Transurban is only paying a dividend yield of 3.8%, only partly franked too (15%).
The yield only increases to 4.2% in the 2017 financial year (FY17) with the company forecasting a distribution to unitholders of 50.5 cents – 11% higher than this year's 45.5 cents.
For investors looking for a blue chip dividend play, Transurban is far from good value at current prices.
In the last financial year, Transurban reported $910 million of operating cash flow, and $926 million in free cash (which includes dividends and interest received from non-100% owned entities). With a market cap of $24.4 billion, Transurban is effectively trading on a multiple of 26.4x.
Additionally, on an enterprise value to EBITDA (EV/EBITDA) ratio, Transurban sports a relatively high ratio of over 24x. For a company with solid and consistent but usually low growth rates, that appears to be a high price to pay.
Another issue is that Transurban's assets – its toll roads – have to be handed back to the government or owner debt free when the concession expires. In other words, the closer we get to those dates, the lower their value.
These are not assets that Transurban will hold forever – it is due to hand back its share of the M5 Motorway in Sydney – one of its highest revenue contributors – in 2026. A number are longer life assets – most concessions expire around 2050 – although the US assets expire in 2087.
With $12 billion of debt, Transurban paid $728 million in interest costs last financial year – not including any debt repayments. And remember that we are in an era of ultra-low interest rates.
But there's also the question of how Transurban is going to repay that debt.
The company paid out virtually all of its cash flow per security (46.8 cents) in dividends, leaving essentially nothing to pay down debt.
Foolish takeaway
Transurban is not the safe blue chip that many envision and has a number of hidden risks that most investors appear to be ignoring.
