TransCanada Pipelines's dividend reduction © Connolly Report Dec 99 p 447
After the furor over the dividend reduction from $1.12 to 80¢ on December 8th, Doug Baldwin,
TransCanada Pipeline's CEO, said "I never guaranteed or promised anything." I don't doubt him.
But, on page 2 of TCPL's 1998 annual report, they said "Yes" they could maintain the dividend at
the $1.12 level. Nevertheless, investors and analysts were upset by the announcement, to say the
least. TransCanada's earnings were holding up, assets sales were adding to cash flows and
dividend reinvestment programs were reducing cash payouts. The January 31st payment of 28¢ has
already been declared. In April, 2000, the quarterly payment will become 20¢, the TCPL
representative told me. TRP's 2000 dividend will be .28 +.20 +.20 +.20 = 88¢. The yield in the
papers is too high.
I reckon pressure on TRP's price got too much for management. To stop the share price descent,
they most likely reasoned, TCPL had to do something drastic. Among other measures and all at
once, they announced a formal restructuring plan, more layoffs and a massive $700 million
write-off against fourth quarter earnings. Because most people compute returns by adding capital
appreciation to yield, if they consider yield at all, price matters. And, while it certainly bothers me
to see the price falling, especially when the price gets well below my $17.87 purchase price in
1994, as long as the dividend holds I don't get very annoyed. Now I'm ticked and trapped. My
2000 yield now becomes 4.9% (.88/17.87). Work out your new yield. It should help with your
decision about TransCanada. And think positively: at least the verb "eliminate" the dividend was
not used.
I'm not going to sell. However, I have not yet decided whether to buy more TRP or not. The wait
for a dividend increase might not be too long. TransCanada has done this before. In 1988, when
interestingly, the dividend was also $1.12, they reduced it to 79¢ (from .28 to .17). By 1990, the
dividend began rising again and it grew at an above average rate through to the last increase to
31¢ in January of 1998. There's more good news. After TCPL's "Strategic Actions"
announcement, Moody's affirmed TransCanada's ratings with a stable outlook (eg: Prime-1 for
commercial paper ) as TransCanada plans to use asset sale cash flow to reduce debt and improve
its balance sheet.
Go to Feb 2000 comment about TRP
TransAlta's dividend will be maintained (DBRS will maintain ratings too)
In late November, the Alberta Energy and Utilities Board, in an 800 page decision, lowered
TransAlta allowed a rate of return to 9 1/4% in both 1999 and 2000. This decision will severely
affect this electric utilities's earnings. In a conference call with analysts about this decision on
November 29, 1999, a transcript is available on TransAlta's web site, Ian Bourne, TransAlta's
chief financial officer, said: "We are, and continue to be and are committed to the dividend and to
growing the company. We recognize that this level of earnings is going to put some pressure on
the dividend and our commitment is to figure out a way to make sure that that dividend is
maintained. We see that that is an integral part to growing the business, and we remain committed
to growing the business. So, in terms of concerns on the dividend, there should be no doubt in
anybody's mind that our view is we are going to sustain the dividend." After TransCanada
Pipeline's decision to reduce their dividend a few days later, more pressure was put on TransAlta
and other companies whose share price has already dropped. So on Monday, December 13th,
TransAlta issued a press release: "The board of directors confirmed its intention to maintain the
current dividend.", President and CEO Snyder said.