The share price of Transurban Group (ASX: TCL) continues to run ahead following its full year results and hopes that the toll road operator can strike a compromise with the competition regulator over its bid for WestConnex.
The news has overshadowed a downgrade of the stock by Credit Suisse with Transurban zooming ahead by 0.8% to $12.04 in after lunch trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.6%.
But dividend-focused investors who've taken a shine to Transurban should pay attention to the downgrade even as our only listed toll road operator tries to win the Australian Competition and Consumer Commission's (ACCC) blessing for its potential acquisition of Sydney's WestConnex by promising to share more detailed and accurate traffic data with the market.
One of the worries the ACCC has about Transurban's takeover of WestConnex (if it wins the bid) is the traffic data the company will have across its portfolio of tollways. This could give it an unfair advantage over competitors when negotiating for subsidies.
If the ACCC were to block the acquisition, it will make it hard for Transurban to buy any other road asset in this country. Transurban needs to show the market it has growth left in its tank to fund investors' insatiable need for ever more dividends.
Dividend growth is particularly important to Transurban at this juncture as it needs to keep ahead of rising global bond yields (which will otherwise dampen the attractiveness of owning the stock) and to keep its share price momentum.
This is why investors should pay attention to Credit Suisse's decision to cut the stock to "neutral" from "outperform" as the broker is warning that Transurban's dividend growth might be stuck in the slow lane.
For one, the company's FY19 dividend guidance of 59 cents a share, which is up 5.4% from last year, is behind Credit Suisse's expectations.
The broker also noted that management's long-term incentives (LTIs) for FY19 are based on a three-year free-cash-flow compound annual growth rate (CAGR) target of 5.5% to 7.5%.
"This is a significant drop from the average midpoint target of ~11% for the LTIs during the last five years," said Credit Suisse.
"Transurban appears to be entering a more intensive investment phase, while asset prices still remain elevated."
Further, Transurban appears to be more exposed to delivery challenges on its star NorthConnex project than Credit Suisse previously expected.
NorthConnex could be facing a three-month delay to its original completion date at the end of calendar 2019.
While management still expects the project to be completed within budget, the delay is likely to have a financial impact on the company and there's little clarity on how much Transurban's liability can be shared with its contractors.
Credit Suisse has cut its dividend forecast by 3% in FY19 and 9% for the following year. It has also lowered its price target by 50 cents to $12.30.
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