The Motley Fool

Why this top broker just downgraded Transurban Group (ASX:TCL)

The share price of Transurban Group (ASX: TCL) continues to run ahead following its full year results and hopes that the toll road operator can strike a compromise with the competition regulator over its bid for WestConnex.

The news has overshadowed a downgrade of the stock by Credit Suisse with Transurban zooming ahead by 0.8% to $12.04 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.6%.

But dividend-focused investors who’ve taken a shine to Transurban should pay attention to the downgrade even as our only listed toll road operator tries to win the Australian Competition and Consumer Commission’s (ACCC) blessing for its potential acquisition of Sydney’s WestConnex by promising to share more detailed and accurate traffic data with the market.

One of the worries the ACCC has about Transurban’s takeover of WestConnex (if it wins the bid) is the traffic data the company will have across its portfolio of tollways. This could give it an unfair advantage over competitors when negotiating for subsidies.

If the ACCC were to block the acquisition, it will make it hard for Transurban to buy any other road asset in this country. Transurban needs to show the market it has growth left in its tank to fund investors’ insatiable need for ever more dividends.

Dividend growth is particularly important to Transurban at this juncture as it needs to keep ahead of rising global bond yields (which will otherwise dampen the attractiveness of owning the stock) and to keep its share price momentum.

This is why investors should pay attention to Credit Suisse’s decision to cut the stock to “neutral” from “outperform” as the broker is warning that Transurban’s dividend growth might be stuck in the slow lane.

For one, the company’s FY19 dividend guidance of 59 cents a share, which is up 5.4% from last year, is behind Credit Suisse’s expectations.

The broker also noted that management’s long-term incentives (LTIs) for FY19 are based on a three-year free-cash-flow compound annual growth rate (CAGR) target of 5.5% to 7.5%.

“This is a significant drop from the average midpoint target of ~11% for the LTIs during the last five years,” said Credit Suisse.

“Transurban appears to be entering a more intensive investment phase, while asset prices still remain elevated.”

Further, Transurban appears to be more exposed to delivery challenges on its star NorthConnex project than Credit Suisse previously expected.

NorthConnex could be facing a three-month delay to its original completion date at the end of calendar 2019.

While management still expects the project to be completed within budget, the delay is likely to have a financial impact on the company and there’s little clarity on how much Transurban’s liability can be shared with its contractors.

Credit Suisse has cut its dividend forecast by 3% in FY19 and 9% for the following year. It has also lowered its price target by 50 cents to $12.30.

There are better dividend paying blue-chip stocks to chase in this market, according to the experts at the Motley Fool.

Follow the free link below to find out what these stocks are and why they should be on your watchlist.

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Transurban Group. 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 Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!