The Best Chance in a Generation to Buy This Energy Pipeline Play

At Fortress Portfolio, we understand that knowing when to buy a company is just as important as knowing which company to buy.

And this month, Chief Analyst Adam Galas is highlighting a buying opportunity like we haven’t seen in 23 years.

The last time we saw this happen with this stock, it went on to rise 800% over the next decade. And this time, his analysis shows it could do the same – or even better.

The market has recently punished this stock, but with its safe 8% yield, we’re happy to hold until it comes back and surpasses its recent highs.

It has multiple upcoming catalysts including an upcoming spin-off, so this opportunity may not last long. Read this month’s issue to find out how to take advantage of this play before the rest of the market catches on.

Brad Thomas Editor, Fortress Portfolio

In a panic, smart people can do stupid things.

That’s what we saw back in March and April this year.

Three banks failed in just five days… And fears of the entire financial system collapsing spread across the globe. Moody’s even cut its outlook for the U.S. banking system to negative.

That uncertainty lasted for weeks after regulators stepped in to protect depositors and reassure the markets.

But that didn’t stop the banking sector from taking a hit. In April, the S&P 500 bank index (SPXBK) was down 14% from the start of the year.

But instead of panicking with the masses… we did our research and pounded the table.

I spotted an opportunity to make a profit from an overlooked banking superstar. After moving past the negative sentiment and digging into its numbers, here’s what I found…

The company was trading at 9.3 times earnings, compared to its historical 13 to 14. Assuming nothing was permanently broken with the company, this was a price-to-earnings ratio consistent with the stock’s historical bottoms – during the Great Recession and the pandemic crash.

These were both extreme moments in history. At no other point in the last 20 years did the company ever sink below 9.3 times earnings.

In other words, unless the economy is melting, this world-class A-rated bank is worth more than 9 times its earnings.

At that point, I didn’t see the stock trading for much less than that. So I pounded the table that we load up on shares.

Now, I was a little off. It bottomed three weeks after I recommended it at 7.7 times earnings. But that didn’t matter. Because we’ve beat the S&P 500 by 50% in that time.

As I suspected, the regional banks didn’t keep melting down. The crisis was indeed contained to a handful of poorly run banks. And when the world didn’t end, relief caused regional banks to soar 10%, and our recommendation soared 12% from its lows.

That company was US Bancorp (USB). And overall, we’re up around 3% in four months on our position.

Today, I’m seeing a similar setup in a different sector that’s going through a lot of volatility. So I’m pounding the table again.

This time, we’re targeting an energy play.

Thanks to our 10 years of data gathering and building out a safety system, at Fortress Portfolio, we have our pulse on the best blue-chip stocks in the world. It’s how we know when stocks are likely to survive potential market downturns based on 50 years of history… and whether they present good buying opportunities.

Our models cover ratings agencies, bond market data, accounting practices, fundamental analysis and trends, and hundreds of other metrics. And we’ve had a 95% accuracy rate in detecting whether a company will cut its dividend.

This has allowed us to construct a portfolio of the best, diversified buy-and-hold opportunities in the market for maximum income and safety for decades to come.

And today’s featured pick is no exception…

It offers a safe 8% yield, growing faster than inflation. And that’s the highest it’s been in 23 years – a whole generation has gone by since its yield was this high.

It’s a blue-chip company that owns assets our economy relies on. And it’s planning a spin-off that could improve its operations even more.

It’s been raising its dividend for 23 consecutive years… through recessions, industry crashes, and six bear markets.

And right now, it trades at six times cash flow. The last time it was this cheap, it soared 800% in the next decade.

So let me reveal which Fortress companies I’m talking about and the opportunity it offers today…

Energy was the best-performing sector of the last two years. And our recent special reports highlighted the incredible trillion-dollar opportunities it offers right now.

Boston Consulting Group and Brookfield Asset Management estimate the shift to green energy could be a $150 trillion investment opportunity by 2050… and $390 trillion by 2100.

For context, the entire global economy is $108 trillion today. That’s why Brookfield calls this the second greatest investment opportunity in human history.

As the world transitions to green energy, it’ll rely on natural gas to be the bridge to get us there. And the companies that are best positioned for the future stand to be the recipients of the trillions in investment dollars headed into the space.

And my favorite high-yield energy opportunity right now is the king of North American pipelines, TC Energy (TRP).

We first recommended TC Energy when we launched Fortress in January this year. But as I’ll show you in today’s issue, not only is at the cutting edge of green energy technology… It’s trading at the best discount I’ve seen since I’ve been a serious investor.

TC Energy, formerly TransCanada, was founded in 1951 by a special act of the Canadian Parliament. That was to form a corporation that could raise money on the Toronto Stock Exchange to build the 2,000-mile TransCanada pipeline, now called the Mainline pipeline.

This was a $3 billion project in today’s money. And at the time, it was a herculean engineering feat that required 30,000 workers and took four years to complete.

The Mainline pipeline today has a capacity of 8 billion cubic feet of natural gas. That’s 12% of all natural gas used in North America. And is enough to power about 37 million homes.

The Mainline pipeline is tied to about $2.5 trillion in economic activity in North America.

That’s all running through one pipeline that has been maintained, expanded, and improved by one company for 72 years.

(Source: TC Energy investor presentation)

Of course, today, TC Energy is much more than just the Mainline pipeline. It has almost 60,000 miles of pipeline crisscrossing Canada, the US, and Mexico. That’s more pipeline than exists in the entire nation of Iran.

TC Energy has spent nearly three-quarters of a century building North America’s largest and most critical energy transportation network.

Today, about 25% of all-natural gas and oil used in North America, representing $5 trillion in GDP, runs through its pipelines. That’s the GDP equivalent to the entire nation of Japan – the third largest economy on earth – and Switzerland, combined.

There are few companies with a wider moat anywhere on earth than TC Energy. That’s because there is no way to replicate what TC Energy owns due to modern regulations and legal challenges.

TC is an energy utility so critical to modern life that if it were to shut down its pipelines… 96% of all products you buy would disappear from store shelves.

Everything from medicine to solar panels and even electric car batteries. Yes, you can’t build wind turbines without fossil fuels. And without TC Energy, North America has no green energy transition, representing 20% of the global economy.

(We’ll talk in more detail about TC Energy’s moves in the green energy revolution a little later.)

Plus, not only is it a critical pipeline company, TC Energy is also an energy utility. It supplies 4.2 gigawatts of power to Toronto, keeping the lights on for 3.2 million homes.

Its dividend growth streak is an impressive 23 years. That streak has survived through four recessions, two economic crises, four oil crashes, and even crude oil hitting -$38 per barrel in April 2020.

Whether inflation was -3% or 9%, or interest rates were 0% or 6%… TC Energy just kept its nose to the grindstone and kept on generating rock-steady cash. That allowed it to pay out as some of the most dependable dividends on the planet.

If it continues, which we believe it will, TC Energy will become a Dividend Aristocrat in two years. A designation only granted to the most reliable dividend growth companies that have streaks of raising their dividend for 25 years in a row.

But as wonderful as TC Energy is today, it’s about to get even better… And that’s why we’re talking about it today.

TC Energy recently announced it would spin-off its legacy oil pipeline business, including the Canadian Mainline, into a new company next year.

This tax-free spin-off will create a spin-co (to be named later) and the new TC Energy. The new TC Energy will focus exclusively on regulated power, natural gas, and renewable energy investments.

This might sound confusing, but here’s what it means for us and the company…

This is the fastest-growing part of TC Energy today. And management says spinning it off and focusing on pure growth will boost the company’s growth rate from 5% to 7%.

Meanwhile, the legacy oil pipeline business will grow at 2% to 3%, basically the inflation rate. It’s a regulated business with price increases tied to inflation.

The good news is that demand for the legacy oil pipeline business will remain relatively steady through 2040. After that, we expect it to decline gradually and modestly by 2050.

Management’s plan for the legacy business is to make it a pure, high-yield-focused stock without needing to retain cash to fund growth. Rather, it will focus on buybacks to ensure that the dividend can grow at 2% to 3% over time.

But the new TC Energy – that’s what we’re excited about. That’s because if you buy TC Energy today, you’re getting both companies in one stock for a yield of almost 8%.

And management says it has a plan to grow cash flow at 7% over time. That means even if you ignore TC Energy’s incredible discount to fair value… you’re potentially looking at 15% annual returns in the future.

That’s enough to double your money roughly every five years. It’s also far better than the Nasdaq’s 37-year record of 13.5% annual returns. And the Nasdaq is the most successful index in world history.

And in the future, TC’s management thinks it can continue beating the Nasdaq while delivering an 8% yield that grows at 3% to 5% over time.

Even better, that’s a safe 8% yield from a future global aristocrat energy utility and a dividend that will grow 50% to 100% faster than inflation.

And because the dividend is designed to grow slower than cash flow, the payout ratio and safety of the dividend will keep improving over time. Today, TC’s payout ratio is 50% of its cash flow in an industry where 83% is considered safe by rating agencies.

And those agencies rate TC Energy between BBB and A-, giving it the second strongest balance sheet in the industry.

We rate TC Energy’s dividend a “very safe” 87%. If we were to get another Great Recession or if we locked down the global economy again and oil went to -$38, the risk of TC cutting its dividend would only be about 1.65%.

In a normal recession, like what’s likely coming in 2024, the risk is approximately 0.5%.

TC Energy isn’t just one of the oldest pipeline companies in North America… It has a long-term plan to survive and thrive through the energy transition.

A plan to grow at 7% when half the politicians in America want to see an end to oil as soon as possible… A plan the bond market is so confident in that it’s willing to lend millions of dollars to TC for 60 years.

And that plan is the green energy transition, expected to be a $150 trillion investment opportunity by 2050.

But it’s important to remember – the actual energy transition will take decades, not years.

For example, CalPERS, the giant California pension fund, is very pro energy transition. And it estimates the fastest it could happen if everyone in America agreed on how to do it would be about 20 years. It’s more reasonable, base case estimation is 30-40 years.

According to the US Energy Information Administration (EIA), to get to carbon neutral by 2040 would require 42 times more annual lithium production than we currently have.

And the average time to bring a new lithium mine to production? Thanks to government regulatory red tape and endless environmentalist lawsuits… 16 years.

That gives companies like TC Energy at least 20 years to transition its business models.

And that’s an ambitious estimate. When you account for how long it’ll take various factions of the government to negotiate and agree on the rollout… the conservative estimate is 50-60 years for a full transition.

But TC Energy isn’t going to rest on its laurels for another 50 or 60 years. It’s doing something we love to see: preparing now for the future to get ahead of the curve.

It has a plan to replace the cash flow those legacy energy sources are generating today with green renewable energy that will keep the company profitable for centuries to come.

The Alberta Carbon Grid is a joint venture between TC Energy and Pembina Pipeline (another one of our Fortress Future Energy holdings). The project’s first stage will pump 10 million tons of carbon into the ground and eventually scale to 20 million.

For context, each year, Alberta’s tar sands operations – which are large deposits of crude oil – produce 70 million tons of carbon. Capturing 20 million tons represents a 30% reduction in net emissions for this part of Canada’s energy industry.

It represents a 2% reduction in all Canadian carbon emissions from a single project.

And that’s just carbon sequestration. TC Energy is also working on producing renewable hydrogen, potentially a $3.2 trillion global industry by 2030.

Hydrogen will be necessary for everything from the jets of the future to green cement, concrete, and steel production. These are all things that a rapidly urbanizing world will need in the future.

It’s also working on renewable natural gas and capturing methane from landfills and dairies. Because the world might no longer need fossil fuels one day, but it will always need food. And ammonia is needed for fertilizer to feed the 10 billion human population the UN expects by 2050.

Carbon sequestration and hydrogen represent large enough markets where TC Energy can replace its current revenues several times over. Add in the potential for buybacks to keep cash flow and dividends per share growing faster than revenue… and that’s how TC gets its plan for 50 to 60 years of solid growth through the energy transition.

And remember, that’s a plan that the bond market, the “smart money” on Wall Street, has blessed with the most powerful endorsement of all: tens of millions in real cash at risk in the form of bonds maturing in 58 years.

TC Energy is a true “buy and hold forever” dividend champion.

By buying the stock, you get a world-class management team and 7,500 employees in three countries working hard to make your investment a success.

Right now, TC Energy’s dividend is growing 4% per year, faster than the inflation rate.

And remember that total returns aren’t just about starting yield and long-term growth. 8% yield + 7% growth guidance is 15% long-term total return guidance from this world-class management team.

The benefit of buying TC Energy at a 30% historical discount sets us up for great returns from these levels. If TC Energy grows as management and analysts expect, we could see total returns each year around:

And in 10 years, we’re looking at a potential 323% return.

The S&P 500, thanks to a decade of free money from the Fed and record low interest rates, was able to generate 16% annual returns for a decade by flying into a bubble. In the next decade Oxford expects 1% to 2% annual returns as the excess gets worked off. Most economists think 5% to 6% is more realistic.

But TC Energy – thanks to being so undervalued, yielding so much – and growing so fast, could sustain S&P-level returns of the last decade for decades to come.

And if that all wasn’t good enough… Here’s the final reason I’m pounding the table, US Bancorp style, about this amazing stock today…

TC Energy’s 8% yield is the highest in 23 years. That’s what makes it the best time to buy this stock in a whole generation.

You must go back to the end of the tech bubble when value stocks got crushed and fell 50% to see those levels.

Back then, no one cared about anything boring like dividends. Growth was all the rage in the early 2000s. And new technology like the internet meant valuations were a quaint notion for people who didn’t realize that “this time was different.”

Sound familiar?

The last time TC Energy yielded 8%, here’s what happened over the next 10 years…

TC Energy turned $1,000 into $9,281, while the Nasdaq turned $1 into $465 by falling 53%.

Losing half your money after a decade? Yes, that’s the power of the biggest stock market bubble in history and some bad timing regarding recessions.

But with a Fortress-type stock like TC Energy, it delivered these returns the last time it was this undervalued:

(Source: Portfolio Visualizer Premium)

And the next 15 years could be great for TC Energy shareholders, too.

Management expects an 8% yield + 7% growth + 2.3% valuation boost (30% discount vanishing over 15 years) = 17.3% annual returns or a 1,095% total return.

Is history a guarantee of future results? Of course not. Can management guidance be wrong? Sure.

But this energy utility has a great management team and a highly predictable business model.

And the last time it was this outrageously cheap, it delivered 19% returns for the next 15 years.

The fundamentals say TC Energy’s management isn’t blowing smoke; they have a runway for 1,100% total returns in the next decade.

And if they’re wrong and can’t deliver 7% growth… We’re not worried. We can still earn an 8% dividend yield growing at 4% for the foreseeable future.

The biggest risk to TC Energy’s thesis is regulatory and litigation project approval risk.

The Keystone XL pipeline was a political hot potato for 13 years. TC began working on that expansion in 2008 and finally abandoned it in 2021 after the Biden Administration pulled the necessary permits.

TC Energy spent $15 billion on Keystone XL and is trying to sue the U.S. government to get reimbursed for its costs.

Keystone XL represents the worst-case scenario. But there are only some things that can go wrong with major pipeline projects.

The company had to recently double its estimated costs for the Coastal GasLink project in British Columbia, Canada, from $4.9 billion to $10.8 billion.

As a result of these extra expenses, S&P downgraded TC Energy from stable to a negative outlook, indicating a 33% chance in the next two years that it would be downgraded to BBB.

That’s due to the higher debt and interest costs TC would need, though the company has partially managed to fund the extra costs through asset sales.

TC’s upcoming spin-off of its oil business should also help fund its growth project backlog because the new spin-co is taking on $8 billion in debt from TC Energy.

This is the main reason the stock is down about 35% since its June 2022 highs. It’s also important to note the peak was partially driven by Russia’s invasion of Ukraine, which sent oil prices through the roof.

Now, it’s important to keep in mind: These setbacks are perfectly normal in this industry.

And on top of that, TC Energy’s fundamentals and growth prospects indicate its current undervaluation is not justified.

This world-class company is trading at just 6 times cash flow, which prices in -5% long-term growth. TC Energy is guiding for 7% growth; analysts expect 6% growth. That more than makes up for the -5% growth that’s currently priced in.

And when TC Energy performs better than these priced-in expectations – which is what our analysis shows – we should see the stock take off higher.

Management has a solid plan to bring down leverage (debt/cash flow ratio) for the combined company from 5.5 today to 4.75 by 2024 (5 or less is considered safe). But if TC stumbles on execution, it could face growth challenges.

Not only because some of its big projects might still need to be completed, but also because in a world of higher-for-longer interest rates, the profitability for infrastructure projects naturally declines.

So we will keep a close eye on these factors and keep you informed of anything you need to know or if our fundamental thesis changes.

Some other things to consider with this investment…

TC Energy is a Canadian company that pays qualified dividends and uses a 1099 tax form. It’s not a master limited partnership (MLP), so there’s no K1 tax form to deal with.

However, as a Canadian company, there is a 15% dividend tax withholding in taxable accounts. In tax-deferred accounts like IRAs and 401Ks, there is no withholding. One option is getting a tax credit to wipe out the withholding tax in taxable accounts, though it involves some paperwork at tax time.

Always remember, we’re not tax professionals and can’t give individualized advice. Be sure to consult an accountant or other tax professional when making these kinds of investments.

Currency risk is another factor to remember. But this one is minor and only plays a role if you want to buy a large amount of any Canadian company like TC Energy.

Within our Fortress Portfolio allocation, we recommend an equal weighting of all stocks, so 4.4% each. Our max risk cap recommendation, given this company’s legendary quality and safety, is 20% or less of your portfolio. Most people would be more comfortable with 10% or even 5% or less position sizing.

If you own it within a diversified and prudently risk-managed portfolio for your needs, currency fluctuations affecting dividends are minor and cancel out over time.

TC Energy is trading at the highest yield in 23 years. There is no fundamental reason for that. The recent setbacks with its project don’t mean it doesn’t have a clear path towards 6% long-term growth. And management thinks its new growth-oriented strategy could boost that to 7%.

When earning a safe 8% yield, all it takes is 2% growth to beat inflation, 3% long-term growth to beat the market, and 5% growth to beat the Nasdaq.

With TC Energy, we have the chance to earn Nasdaq-beating returns with a 10X higher yield from a future dividend aristocrat trading at a discounted six times cash flow.

And we have that setup with the bond market’s confidence that it will still be generating cash 60 years from now.

TC Energy is one of the best ultra-yield investment opportunities no one has ever seen. But now you have. So if you haven’t already, now is the best time in a generation to purchase shares of this world-class pipeline and energy play.

A few months or years from now, you’ll be thanking yourself if you do.

Action to Take: Buy shares of TC Energy (TRP) Buy-up-to Price: $50.27 Position Sizing: 4.4% of your Fortress Portfolio. Or up to 20% in an individual portfolio. Risk Management: 30% hard stop loss ($25.24 for our tracking purposes)

The recession almost every economist thought was coming in the first half of 2023 now appears delayed to the first half of 2024.

This is because of the record government stimulus sent out during the pandemic. Americans have steadily spent the excess savings. This explains why the economy has remained resilient despite the most aggressive rate hikes in 42 years.

But they’re likely to be gone by the end of 2023.

Peak consumer spending historically happens 18 months after the first Fed hike. That would be September 2023. By the end of 2023, we’ll have consumer spending data for October and November (one month lag for these reports).

70% of the US economy is driven by consumer spending. Credit card spending data has rapidly deteriorated in recent weeks. And the Fed’s Senior Loan Officer Opinion Survey (SLOOS) shows a collapse in recent new credit card lending to consumers.

Add in 22% average credit card interest rates, the highest in history, and rising credit card delinquencies… And it looks more and more like the recession hasn’t been canceled, just delayed until the pandemic stimulus has been exhausted.

The bond market, via yield curve inversion, anticipated a recession would begin between June 30, 2023, and July 31, 2024.

The weekly real-time and monthly data are consistent with the first half of 2024 recession.

Here is what that means for the S&P 500, which is currently 15% overvalued and trading at 19.3 times forward earnings, compared to 16.9 for the 25- and 45-year averages.

(Sources: Bloomberg, FactSet)

But rest assured. Regardless of what happens, we’ll be ready to face these declines. We hold the most resilient companies in our model portfolio, which we built to weather market volatility.

And we’ll continue spotting the safest long-term dividend plays along the way – especially when they’re trading at short-term discounts… like the setup we have with TC Energy today.

(Source: Gurufocus Premium)

I welcome your questions and will try to answer as many as I can in the weekly update videos and these monthly newsletters.

Just remember, I can’t give individual investment advice. But I can supply information and general guidance for the average investor. Write in with your questions here.

Safe investing,

Adam Galas Chief analyst, Fortress Portfolio