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Why the Transurban share price has stopped rising

Sebastian Bowen

For most of the year, shares of Transurban Group (ASX: TCL) seemed to be unstoppable. TCL shares started January off at $11.93, but spent the following months consistently climbing all the way to $16.06 – the stock’s current all-time high reached in early August, a gain of 74% in 8 months.

However, since then, its been a slow tapering off for the Transurban share price, as you can see in the graph below (the crude coloured lines were inserted by yours truly)

Transurban Group Chart and Price Data YTD 2019

Since August, TCL shares have gone… well, nowhere in particular. In fact, Transurban share were back to around the $14 mark by early September but seem to have stabilised around $15 – and last traded for $15.36 yesterday.

So why this screeching halt for the toll-road king?

Well, I have a theory.

Transurban’s dividend

As interest rates have been progressively lowered over the course of this year, defensive ‘bond proxy’ stocks like Transurban have become more attractive, especially for income investors and retirees. Since Transurban is in the business of toll-roads, its earnings (and dividends) are unlikely to be drastically impacted by a recession or some other kind of economic shock. This (in my opinion) explains the dramatic run up in the TCL share price earlier in the year.

But the more a company’s share price rises, the less dividend yield new investors will receive if they buy in. This creates a ‘counterbalancing’ effect as the shareholders who bought Transurban for a 6% yield aren’t prepared to keep buying when there’s only a 4% yield on offer.

In FY19, Transurban paid a distribution of 59 cents per share, which equates to a yield of 3.84% on current prices. Transurban is estimating it will pay a 62 cents per share distribution in FY20, which would in turn translate to a yield of 4.04%.

Transurban does have a nice habit of increasing its annual payouts every year (which it has done consistently since 2008). It appears, though, that the market has found a ceiling for what they are willing to pay for the yield available on TCL shares. Thus, I don’t expect any more dramatic appreciation in the Transurban share price until it once again raises its distributions, or the Reserve Bank of Australia cuts interest rates again.

Foolish takeaway

Transurban is a great stock for dividend income, but I think anyone who is seeking capital growth from their ASX shares would do better looking elsewhere. In my view, this stock is a one-trick pony, and unless you really love a solid dividend income, there are better offers elsewhere.

The post Why the Transurban share price has stopped rising appeared first on Motley Fool Australia.

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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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019