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Why the Transurban share price fell 7% in August

Well, it has actually happened. For the first time this year, the Transurban Group (ASX: TCL) share price has finished a month lower than where it started it.

That month was (of course) August and Transurban shares went from $16.06 (incidentally Transurban’s all-time high) at the start of the month to $14.95 by the end. September hasn’t started well for the company either – Transurban shares closed yesterday at $14.91. Despite these recent moves, the stock is still up 30% for the year.

So why has this much-loved dividend stalwart been on the nose in August?

In my view, there are two reasons why.

2 reasons Transurban shares fell in August

Firstly, Transurban had a Securities Plan in operation from August 7 until August 30. Under this plan, existing shareholders were entitled to purchase up to $15,000 worth of TCL shares at a price of $14.70 or the weighted average price of the shares between August 26 and August 30, whichever was lower. This would obviously put strong selling pressure on the stock at any price above the $14.70 mark, so this is likely to have had a significant impact on Transurban’s August share price performance.

Secondly, it is possible that Transurban has finally found some resistance to its sky-high valuation. Even after coming off the boil, Transurban shares still have a trailing price-to-earnings (P/E) ratio of 124 – vastly overshooting the current market average of 17.5. For some further perspective, consider that a hot growth WAAAX stock like Altium Ltd (ASX: ALU) has a P/E ratio of 61 on current prices. For a defensive company like a toll-road operator, this is (in my opinion) a grossly overvalued share price by any conventional measure.

Foolish Takeaway

However, this is not likely to matter for the legion of investors who are desperate for a rock-solid dividend in these low-interest rate times. Transurban has flagged that it expects to pay a distribution of 62 cents per share in FY20 – which translates to a 4.15% yield on current prices. That’s a lot better than any term deposit or government bond you can get out there today, and its clearly worth it for many investors.

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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. The Motley Fool Australia owns shares of Altium. 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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