Transurban Group (ASX: TCL) has long had a reputation for ‘safe’ ASX dividend income. As interest rates have become progressively lower in recent years, interest in Transurban as a ‘bond proxy’ (an income share deemed ‘ultra-safe’ by investors) has proportionally increased.
We can see this from the Transurban share price, which (before this month) had climbed from around $9.30 back in 2016 to over $16 by February this year.
But Transurban’s reputation as a ‘safe’ ASX share to buy has taken a big hit. That’s because its share price has done the same over the past month or so. Transurban shares are today going for $10.39 a share after reaching lows of $9.92 just in the past week. That’s close to a 40% drop since mid-February – more than the S&P/ASX 200 Index (ASX: XJO) as a whole (which is down around 31% in the same period).
So much for ‘safety’.
Why Transurban shares are in the buy zone
I think today’s share price for Transurban is highly compelling for ASX dividend investors for a few reasons.
Firstly, I don’t see a significant change to Transurban’s long-term business model. The market is likely selling Transurban off as more and more businesses ask their employees to work from home until the coronavirus situation resolves itself. That means fewer cars on the roads and fewer toll revenues for Transurban as a result.
But I don’t think this situation is likely to last more than a few months at most. And certainly not well into the 2020s. Thus, I think the market is overreacting on Transurban – making it primed for a long-term investment at the current price, in my view.
Secondly, interest rates were cut again yesterday to a fresh new record low of 0.25%. That’s practically zero for all intents and purposes. Since there is almost no opportunity anymore to get a decent yield on capital outside the share market (and perhaps the property market), I see demand for steady ASX dividend payers like Transurban only reaching new highs when financial markets stabilise.
If investors were happy to pay over $16 for Transurban shares when interest rate were at 0.75%, I think they’ll be happy to pay even more now rates are at 0.25%. Since the current trailing yield for Transurban shares is 5.89%, I think now is a great time to potentially get ahead of the crowd on this one.
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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.