The Transurban Group (ASX: TCL) share price has been on a massive run in 2019 so far. Shares of the toll-road operator touched on $13.75 just over a week ago, which was an all-time high and have slightly pulled back to $13.50 at the time of writing. Investors who bought shares on January 2 are up almost 17% on today's prices, which is an incredible return for a defensive, dividend-spewing infrastructure stock like Transurban.
Why investors like Transurban
As mentioned, Transurban is, in my opinion, a highly defensive stock supported by the consistent and stable demand for its infrastructure as well as a lack of substantial competition (motorists either use the toll roads or take time-consuming detours). This literal 'moat' gives them a business model that is very resilient, particularly to changes in the economic cycle, which can provide a high degree of certainty for investors.
As with all infrastructure, Transurban's tolling regime is highly regulated. The company's toll rates are typically indexed to inflation or a rate of 4%, whichever is higher. Over the last decade at least, the rate of inflation has been well under 4% (in the last quarter it was 0%), which has guaranteed Transurban a rising stream of profits in real terms. In addition, continued population growth should see rising vehicle numbers across its network into the future. For the March Quarter of 2019, Average Daily Traffic increased by 2.3% across all markets, which is promising for revenue numbers, particularly when combined with Transurban's pricing arrangement.
Why has Transurban's share price been reaching record highs?
Transurban has been the bearer of good news for investors in 2019 so far – the ACCC chose not to oppose the company's acquisition of the majority holding of the Westconnex project in Sydney, which includes an additional three toll roads in a single network (with bolt-in connections to many potential future projects such as the northern Beaches Tunnel). The first of these new roads (the M4 extensions) is due to open in mid-2019.
I think there are two reasons why investors can't get enough of Transurban. Firstly, with the Reserve bank reportedly looking at cutting interest rates in the near-future, dividend-paying stocks like Transurban become more attractive as term-deposits are dealt yet another blow. Secondly, investors worried (and proven right) about other traditional dividend-payers like National Australia Bank Ltd. (ASX: NAB) maintaining their yields are flocking to safer dividend plays like Transurban for income security.
Foolish Takeaway
Although I think Transurban is a great company for income, particularly for its yield of 4.19% (before franking), the fact that this company is trading on a P/E ratio of over 57 is, in my opinion, bordering on insanity. I would certainly be looking at a far lower entry point for entering this stock if I was so inclined.
