Transurban Group (ASX: TCL) is solely involved in development, operation and maintenance of toll roads in Australia and the United States. Toll roads have high barriers to entry, so that competition does not become a risk for their performance as money making operations. This means that they will generate strong cashflows for a very long time. Once a toll road has been constructed, relatively little extra capital is required to maintain that road.
Economic Background
A toll road operator is a "price maker," unlike a company such as Fortescue Metals Group Limited (ASX: FMG), which is a "price taker." A price maker does not suffer the vagaries of adverse price changes. Rather, a price maker can benefit by increasing prices as the consumer price index changes. Price increases, due to consumer price rises, mainly drop to the bottom line, as most of the cost of the business was taken during toll road development. Also earnings grow as traffic volume increases. Furthermore, well planned upgrades, including lane additions, can generate excess returns.
Transurban's strategy is to diversify its portfolio of toll roads, drive operational efficiencies and upgrade roads as needed. The cost reduction program initiated in June 2008 is progressing well and further savings should negate inflation pressures and see costs remain well contained over the medium term.
Future Prospects
With a portfolio of excellent toll road assets and an experienced management team, Transurban is well positioned for lots of growth potential. This type of enterprise has low risk being a price maker. With a stated dividend of 35 cents for the year ending June 30, the dividend yield 4.7%. Forecast dividend yield is 5.2% for 2015; and 5.6% for 2016.
Therefore, I would be happy to buy at current prices for safety and increasing income returns for the long term.
