The Transurban Group (ASX: TCL) share price has continued its enormous run in 2019 so far. Shares of the toll-road king hit a new all-time high of $15.58 at open last Friday, before pulling back slightly and are trading around $15.16 at the time of writing. Transurban is now up over 30% YTD and over 40% since October last year. Transurban has now returned over 21% to shareholders per annum over the past 5 years (not including dividends) making it one of the most lucrative blue-chips on the ASX during this time.
A refresher on Transurban
Founded in 1996, Transurban is the largest toll-road operator in Australia. Transurban owns or operates 16 major roads across the country, as well as a few interests in North America. Some of Transurban's assets you may have heard of include the Lane Cove Tunnel in Sydney, CityLink in Melbourne and the Gateway Motorway in Brisbane.
Transurban has benefited enormously from NSW roads in particular – earlier this year, the ACCC chose to allow Transurban's acquisition of the Westconnex project in Sydney, which is a series of three new motorways running through the heart of the city with planned connections to other existing Transurban roads upon completion.
Transurban's tolling regime is highly regulated, but this actively benefits the company. Transurban's toll rates are typically indexed to inflation or a rate of 4%, whichever is higher. Over the last decade at least, the rate of inflation has been well under 4% (YTD it has been almost 0%), which has, and probably will continue to guarantee Transurban a rising stream of profits in real terms.
Can this justify the massive surge in pricing?
As you can imagine, earnings from toll roads are highly stable and defensive (meaning they are unlikely to be affected by an economic downturn). This makes Transurban a 'bond proxy' stock, meaning that income investors are drawn to Transurban for its steady dividend payouts. This effect has been exacerbated by the current monetary environment, where traditional bonds are paying negligible returns to investors. Investors who would normally be happy with bonds have been rushing into Transurban shares and other 'bond 'proxies' like Sydney Airport Holdings Pty Ltd (ASX: SYD) to beef up income. This (in my opinion) is why Transurban is seeing these record high prices, and with interest rates seemingly destined to be cut again, this is unlikely to change anytime soon.
Foolish Takeaway
Whilst Transurban is a solid income stock, I believe that the 'yield chase' has pushed up the stock price to a level that is hard to justify. Transurban now has a price-to-earnings ratio of over 50, which is pretty lofty for an infrastructure stock. But for its 4.62% yield, it's clearly worth it for a lot of investors.
