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2 problems with Transurban shares

If you’re a dividend investor of any capacity, I’m sure you will have heard of Transurban Group (ASX: TCL). This company (perhaps more than any other) has benefited enormously from the combination of both record-low interest rates and the perceived safety of its dividend, which together have pushed TCL shares from $11.55 at the start of the year to the price of $15.18 Transurban opened trading at today (a rise of 31.4% for the year so far). This of course means that Transurban is yielding less. In January, you could have locked in a 5.1% yield on your TCL shares based on the 2019 financial year’s 59 cents per share dividend. But on today’s prices, this falls to 3.89% .

However, investors evidently can’t get enough of Transurban and to some extent, I can see why. The company does offer a defensive earnings base built on a wide moat – and by extension a solid dividend. But looking at Transurban’s recently released results for FY19, I can see two problems that are putting me off buying into this company right now.

Problem number one

Investors are being asked (and are paying) a sky-high premium for TCL shares at current prices. For FY19, Transurban generated $2.6 billion of toll revenue, earnings of $2.02 billion and a profit of $260 million – which isn’t very impressive for a company with a $40.5 billion market capitalisation. Although earnings by 12.3% over the previous year (an impressive number), in my view this still doesn’t justify the pricing premium the market is placing on Transurban shares – the trailing price-to-earnings ratio for TCL is over 125.

Long story short, you are paying an awful lot for a ‘safe’ 3.89% yield.

Problem number two

Transurban is a company with a lot of debt. Total liabilities for the company (for FY19) come in at $27.2 billion and current liabilities at $3.79 billion. Compare this with total assets of $35.96 billion, current assets of $1.92 billion and total equity of $8.75 billion and you have a highly leveraged company. To some extent this is justified – Transurban’s assets are incredibly capital intensive, of high quality and partially underwritten by government. But for me it is still an orange light and one that makes me personally take pause.

Foolish takeaway

Although Transurban is a uniquely placed company to deliver solid dividends and defensive earnings – in my opinion, the price is just too high to justify a long-term investment. If you are desperate for a dividend that is relatively safe, then you may want to consider a Transurban position. But bear in mind the leveraged balance sheet and the sky-high stock price. At the least, I would not expect further capital gains on a buy-in right now.

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Motley Fool contributor Sebastian Bowen 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.

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