Is the Transurban Group (ASX: TCL) share price a buy?
I think that’s a good question to consider in the current investment environment. Transurban Group is one of the world’s largest biggest toll road businesses – it builds them, owns them and operates them.
Here are some of the best reasons to consider buying and avoiding Transurban shares:
Transurban currently trades with a trailing distribution yield of 4.8%, which is a lot better than what you can get from a bank account these days.
The income has been steadily growing too, the distribution per unit has grown from $0.40 in 2015 to $0.56 in 2018. Any asset you’re considering should display growth potential.
Transurban is growing nicely both locally and internationally. Its well-established toll roads in Melbourne, Sydney and Brisbane are seeing slow-but-steady growth of traffic numbers and it’s also managing to increase the price of the toll too. The planned WestConnex toll road should be a big boost in the future. Internationally, it is growing in both USA and Canada.
Avoid buying reasons
The first reason that most investors would point to is the valuation. It’s trading at 69x FY19’s estimated earnings with a very large debt figure on its balance sheet. There’s more to Transurban’s valuation than simply its price/earnings ratio, but it does show it isn’t cheap.
Well-respected fund manager Steve Johnson from Forager Australian Shares Fund (ASX: FOR) recently questioned whether toll roads are actually that defensive in a downturn. If your money is tight, wouldn’t you rather spend a bit more time driving over paying a toll?
In the longer-term there are questions about how automated cars will affect toll roads if the vehicle has the option of avoiding the toll road.
Transurban is a business that operates many high-quality assets, however I think there are other defensive businesses out there that may be more attractive opportunities for income like Rural Funds Group (ASX: RFF).
However, both Rural Funds Group and Transurban are trading expensively. If you’re looking for growth I think there are better options for us on the ASX.
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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and 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.