The Transurban Group (ASX: TCL) share price currently offers a defensive yield of around 4.8%, is it a buy?
Transurban, for those that don't know, is a builder, owner and operator of toll roads. If you live in Sydney, Melbourne or Brisbane it's likely you've driven on one of its roads if you use toll roads.
One of the good things about Transurban is that it has been steadily increasing its payout to its shareholders. It has increased its payout each year since 2009. Its latest payment was increased by another 3.57% to 29 cents per security, adding to the wonderful cashflow shareholders have been getting.
The two big drivers for Transurban's growth are the vehicles on the road and the toll rate per car.
In Transurban's September 2018 update the toll road operator revealed that average daily traffic had increased by 3.3%, with growth across all markets.
Transurban has been busy increasing its stakes of some of the toll roads. For example, in September Transurban reached financial close on the acquisition of an additional 8.24% interest in the M5 West Motorway in Sydney and it's going to acquire another 7.15%.
A key part of future earnings growth for Transurban will be WestConnex. Transurban, as part of a consortium, reached financial close to acquire 51% of WestConnex from the New South Wales Government, which was funded by a $4.8 billion capital raising.
Are Transurban shares a buy?
One of the biggest reasons why I haven't decided to buy any Transurban shares has been its valuation. A 4% or 5% income yield may be fairly attractive, but perhaps not for the price we're paying for the earnings – which comes with a lot of debt.
Transurban is trading at around 69x FY29's estimated earnings. The earnings and distribution may raise over the coming years, but its share price hasn't done much over the past two and a half years. The price we pay is very important for future returns, I think there are better valued buys out there today.
