Should You Consider Buying South Bow Stock for Its Impressive 8% Dividend Yield?

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In October 2024,

TC Energy

(

TSX:TRP

) finished spinning off its liquids pipelines division, establishing

South Bow

(

TSX:SOBO

) as a standalone, publicly listed company. The South Bow system encompasses roughly 4,900 kilometers of crude oil pipelines linking Albertan resources to major refineries in the United States. Following the separation, TC Energy will concentrate solely on natural gas infrastructure, storage facilities, power operations, and comprehensive energy solutions.

The creation of South Bow as a spin-off from TC Energy presents an attractive investment opportunity due to its role as a focused liquids pipeline firm managing extensive crucial crude oil facilities, such as the Keystone pipeline system. Additionally, South Bow aims to sustain dividend payments via steady cash flow generation while investing further in its pipeline network to improve operational efficiency and ensure reliable supplies to high-need North American markets.

This division allows South Bow to adopt a specialized strategy without vying for financial resources alongside their natural gas and power divisions. Operating as a separate business, the firm enjoys consistent, contractually secured revenue streams and anticipates gradual yearly increases in EBITDA of around 2-3%, fueled by internal development and scheduled infrastructure expansions such as the Blackrod Connection Project beginning in 2026.

Even with a heightened leverage ratio of 4.8-5.0 times net debt-to-EBITDA due to the assumed $7.9 billion in debt, South Bow intends to pursue a methodical reduction of this debt over a period of three years via careful management of capital expenditure and increases in earnings before interest, taxes, depreciation, and amortization (EBITDA).

The firm’s minimal risk level, supported by extensive long-term agreements and critical infrastructural resources, ought to uphold its yearly dividend of $2 per share, which equates to an anticipated return rate of 8%.

The strategic location of South Bow leverages beneficial North American crude oil supply and demand dynamics, providing operational versatility and expansion adaptability particularly within the liquid fuels market.

What was the performance of South Bow stock like in 2024?

In 2024, South Bow announced a normalized EBITDA of $1.09 billion USD along with a distributable cash flow totaling $608 million USD. With an yearly dividend set at $2 per share, their overall dividend expenditure comes to approximately $415 million USD, which suggests a payout ratio below 70%.

South Bow mentioned that its performance was supported by substantially contracted assets with low commodity exposure, offering steady cash flows for investors.

In anticipation of 2025, South Bow projects normalized EBITDA to be around US$1.01 billion with a margin of plus or minus 3%, bolstered by approximately 90% of their revenues being under contract. Nevertheless, persistent uncertainties surrounding tariffs could pose challenges for non-committed volume capacities on the Keystone pipeline network, leading the management team to decrease risk levels within the Marketing division.

CEO Bevin Wirzba highlighted South Bow’s methodical strategy for managing capital distribution even as they chase expansion within current routes. By the end of this year, the leverage ratio is anticipated to hit around 4.8 times due to South Bow’s progress on the Blackrod Connection initiative. Deleveraging will commence in 2026 once the project starts producing revenue.

The South Bow keeps a quarterly dividend at US$0.50 per share while aiming for long-term debt reduction to reach a ratio of four times. Despite short-term market fluctuations due to uncertainties in trade policies, management continues to express optimism regarding the fundamental strengths of the Western Canadian oil sands sector.

Is thisTSX-listed dividend stock undervalued?

Analysts tracking the

TSX dividend stock

anticipate diluted earnings to increase from $1.56 per share in 2025 to $2.14 per share in 2029. Based on current analyst price projections, SOBO stock is expected to rise by approximately 6% within the coming year. When factoring in dividend payments, this could result in total returns of around 14%.

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Should Investors Consider Buying South Bow Stock Due to Its 8% Dividend Yield?

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Is it advisable to put $1,000 into South Bow at this moment?

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Aditya Raghunath

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