Is Transurban Group (ASX:TCL) a buy or a sell?

Transurban Group (ASX:TCL) is a hard one to judge.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are few other shares on the ASX that you could describe more like a 'bond proxy' than Transurban Group (ASX: TCL).

The toll road operator's share price has fallen by around 10% since the start of the year. One of the main catalysts for that has been the rising bond rates as a consequence of the US Fed increasing its interest rate. Defensive shares don't look as attractive when you can get decent safe returns elsewhere.

Transurban operates toll roads in Sydney, Melbourne, Brisbane and North American. It has long been seen as a defensive income idea because of the steady increase of traffic due to the growing populations in each of the cities. It also gets to increase the price of each toll as well over time.

For example, in the latest quarterly traffic update for September 2018 it reported 3.3% growth of average daily traffic across all markets. That's not bad considering it also grew proportional earnings before interest, tax, depreciation and amortisation (EBITDA) by 10.2% in FY18.

Transurban has provided guidance for the FY19 distribution of 59 cents per unit, despite a capital raising relating to the WestConnex bid, which means it's trading with a forward yield of 5.4%.

Is that yield enough to compensate for the real risk of falling value? The risk-free rate of US 10-year treasuries is now nearly 3.2%.

Rising interest rates also mean the debt on Transurban's balance sheet will steadily get more expensive over time.

It's true that WestConnex is a big opportunity for Transurban. The toll operator could continue growing nicely through organic growth and more toll road wins. It has developed a strong niche for itself as a owner, operator and constructor of toll roads.

In the longer-term automated cars could be a positive for Transurban because the reduced cost of travel could encourage even more people to use cars on the road.

Foolish takeaway

Despite the fall I still don't think Transurban is good value. I'd want a yield of at least 6% before even considering it, which represents a fall of another 10%. Until then, I've got my eye on more attractive income opportunities.

Motley Fool contributor Tristan Harrison 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.

More on Defensive Shares

Men standing together and defending the goal post symbolising defensive shares.
Defensive Shares

4 defensive ASX shares to own in a greedy market: Macquarie

These experts reckon the ASX's record highs won't last...

Read more »

Two mature women learn karate for self defence.
Defensive Shares

2 defensive ASX income shares I think investors should consider buying for bumper returns!

These stocks could offer defence and good returns.

Read more »

Defensive Shares

The pros and cons of buying Telstra shares right now

Is this an opportunity calling?

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Defensive Shares

My 2 favourite ASX utility shares for January 2024

These stocks could provide a good mixture of defence and growth.

Read more »

safe dividend yield represented by a piggy bank wrapped in bubble wrap
Defensive Shares

Weathering market storms: Dividend stocks in Australia as a safe harbour

Defensive earnings could help provide stability.

Read more »

safe dividend yield represented by a piggy bank wrapped in bubble wrap
Defensive Shares

Here's my recommendation for safe ASX shares to buy in December 2023

I think these stocks could be two leading defensive picks.

Read more »

Men standing together and defending the goal post symbolising defensive shares.
Defensive Shares

5 top defensive ASX shares for turbulent times

These stocks could be long-term defensive winners.

Read more »

a child dressed in army fatigues lies on the ground in his backyard wearing leaves and branches on his head as camouflage and peering through a pair of binoculars in a soldier pose.
Defensive Shares

Searching for defensive ASX shares? Here's what I look out for

Not all defensive companies make for good investments.

Read more »