Is the Transurban Group (ASX: TCL) share price a buy for income? I believe it's worth considering.
One thing is for sure, its total returns have been impressive in recent years. Since the start of 2019 its share price alone has risen by 13.2% and over the past five years its share price has nearly doubled.
Transurban has benefited from a three-part strategy that has boosted its earnings – higher tolls, more traffic on each road and more roads.
The rising populations of Melbourne, Sydney and Brisbane have translated into growing traffic numbers for Transurban's roads. Automated cars are the only thing that could be a problem on the horizon.
As a reminder, Transurban recently reported its half-year result showing that average daily traffic grew by 2.7%, proportional toll revenue increased by 9.3% to $1.29 billion and proportional earnings before interest, tax, depreciation and amortisation (EBITDA) grew 9.5% to $1 billion.
It reports "proportional" earnings because it owns different stake percentages of different roads.
Transurban can be a tricky one to value because using its estimated earnings per security (EPS) it's valued at 73x FY20's estimated earnings, which puts it up there with the expensive WAAAX ASX tech shares. It has a large depreciation accounting expense, which isn't reflected in its cashflows. That's why for some (or all) businesses it can be a better idea to focus on (free) cashflows, which Transurban has a lot of.
In the half-year result it generated $715 million of free cashflow compared to a statutory profit of $145 million. That's how it is able to sustain such generous growing distributions.
Some investors feel the risk with Transurban is now too high for the valuation with a number of projects in Australia and North American that need to be delivered on time and on budget to justify today's share price, particularly with how much debt Transurban has on its balance sheet.
Foolish takeaway
Transurban has a guided FY19 distribution yield of 4.5%. If income is your only goal then Transurban could be a decent idea for the next few years, but for total returns I would rather buy it with a yield of above 5%.
