Transurban: Toll roads and demographic tailwinds

Shifting gears, Transurban (TCL) is Australia’s largest toll road operator which builds and operates toll roads in Melbourne, Sydney, and Brisbane as well as Greater Washington in the USA and Montreal in Canada.

Like CSL, the group’s operations were severely impacted by the pandemic and lockdowns but 2023 is a return to earnings growth as Australians and Americans move on with their post covid daily lives.

Typically, toll road builders and operators are considered as sensitive to changes in interest rates due to the financials – high levels of debt to finance the build which is then paid off by the steady income streams once the roads are operational.

However, Transurban has a natural hedge against rising interest rates. The tolls are CPI (inflation) linked, meaning they are allowed to increase prices to offset rising finance costs. Most of their debt is long-dated and therefore not exposed to higher rates immediately, only when the debt is refinanced.

Transurban is also a longer-term play on Australia’s rising population and strong employment, which makes it one of the favourite stocks for those investors who like to receive a stable income stream as well as long-term capital gain.

Transurban is another stock that is expensive on a price-to-earnings basis, as investors usually consider the almost annuity-style dividend yield as the benchmark for how cheap or expensive the company is.

At current levels of a 4.2% projected yield for FY24 (as FY23 is almost finished), it ranks around the cash rate, which some investors may see as fully valued when considering the equity risk of owning shares.

Transurban daily chart