Some investors don't quite seem to be able to get their heads around the benefits of the cashflow of shares like Transurban Group (ASX: TCL).
It certainly seems expensive when you look at it at face value. According to analyst estimates, it's trading at nearly 70x FY19's estimated earnings with a large amount of debt on its balance sheet. That doesn't seem attractive at all.
It is true that low interest rates have driven up valuations of 'bond proxy' shares like Transurban and Sydney Airport Holdings Pty Ltd (ASX: SYD). Transurban has grown its earnings well, but the share price has nearly doubled over the past five years.
The benefit of Transurban for shareholders is that (usually) the free cash is much higher than the accounting profit after tax, allowing the business to support much higher distributions than the profit suggests.
Transurban's distribution has been growing year after year since 2009 as the business re-invests for growth, benefits from organic growth and increases profitability.
The number of vehicles on Transurban's toll roads continue to increase and the toll prices are growing over the long-term. That's how Transurban managed to report an increase of toll revenue by 9.3% to $1.29 billion and 9.9% growth of EBITDA excluding significant items to $1 billion in the recent result.
Transurban is guiding that the FY19 distribution will be 59 cents per security, representing growth of 5.4% compared to FY18.
At the current valuation this means that Transurban is trading with a FY19 distribution yield of 4.75%. Is that yield from Transurban worth investing in shares for income? And really, how defensive would toll roads be in a recession? Transurban doesn't personally attract me for my own portfolio.
