Investors like TC Energy’s spin off of South Bow

TC Energy Ltd. completed the spinoff of its pipeline assets on Oct. 1 giving shareholders 1 share of the new South Bow Corp. (TSX:SOBO) for every 5 shares of TC Energy (TSX, NYSE: TRP) they owned. 

The market has reacted favourably. By the end of last week, 3 weeks after the split, the combined companies were trading more than 10% higher than pre-split on Sept. 30.

South Bow’s largest asset is the Keystone pipeline which transports oil in Canada and the US. Its shares opened at $29.25 on Oct. 1 and have risen 13.3% to the current price of $33 at the time of writing. The shares may remain volatile as TC Energy shareholders decide whether to keep or sell and new investors assess South Bow’s prospects. The consensus for now is more buying than selling.

TC Energy shares have seen a 10.6% increase, rising from $58.86 at the opening on Oct. 1 to $65.11 at the time of writing. It holds the company’s natural gas and nuclear power plant assets and is using the proceeds to reduce its debt load. 

 TC Energy says the combined dividends of the two companies will be equivalent to TC Energy’s annual dividend prior to the spinoff.  The ratio will be roughly TC Energy (86%) and South Bow (14%).

TC Energy raised its dividend by 3.2% to $0.96 quarterly with the April 30 payment. At the  current price it yields 5.39%. It plans to increase its dividend by 3% to 5% a year.

It will likely reduce its dividend to $0.825 which would yield 5% at the recent price of $65.09. South Bow is expected to pay a quarterly dividend of $0.135 which would yield 1.6% at the recent price od $33.49

In a research note, RBC Capital Markets analysts were positive about the split.  It said South Bow offer investors exposure to Keystone, one of North America’s most critical energy pipelines. It has long-term contracts and an attractive dividend. RBC initiated coverage with a price target of $34.

RBC has an equally optimistic view of TC Energy’s prospects with a price target of $67.

This article appeared in a recent issue of the Internet Wealth Builder.  For information on how to reprint this article please view this page.