There are few other shares on the ASX that you could describe more like a 'bond proxy' than Transurban Group (ASX: TCL).
The toll road operator's share price has fallen by around 10% since the start of the year. One of the main catalysts for that has been the rising bond rates as a consequence of the US Fed increasing its interest rate. Defensive shares don't look as attractive when you can get decent safe returns elsewhere.
Transurban operates toll roads in Sydney, Melbourne, Brisbane and North American. It has long been seen as a defensive income idea because of the steady increase of traffic due to the growing populations in each of the cities. It also gets to increase the price of each toll as well over time.
For example, in the latest quarterly traffic update for September 2018 it reported 3.3% growth of average daily traffic across all markets. That's not bad considering it also grew proportional earnings before interest, tax, depreciation and amortisation (EBITDA) by 10.2% in FY18.
Transurban has provided guidance for the FY19 distribution of 59 cents per unit, despite a capital raising relating to the WestConnex bid, which means it's trading with a forward yield of 5.4%.
Is that yield enough to compensate for the real risk of falling value? The risk-free rate of US 10-year treasuries is now nearly 3.2%.
Rising interest rates also mean the debt on Transurban's balance sheet will steadily get more expensive over time.
It's true that WestConnex is a big opportunity for Transurban. The toll operator could continue growing nicely through organic growth and more toll road wins. It has developed a strong niche for itself as a owner, operator and constructor of toll roads.
In the longer-term automated cars could be a positive for Transurban because the reduced cost of travel could encourage even more people to use cars on the road.
Foolish takeaway
Despite the fall I still don't think Transurban is good value. I'd want a yield of at least 6% before even considering it, which represents a fall of another 10%. Until then, I've got my eye on more attractive income opportunities.
