Transurban Group (ASX: TCL) shares have long been a favourite for some investors who enjoy its stability and steady growth. But there’s one big risk this company faces.
The Positives
Transurban is one of the world’s largest toll-road operators with toll roads in Melbourne, Sydney, Brisbane, Washington and Montreal.
Currently, Transurban has a portfolio of 17 roads with 1.5 million daily trips.
In their most recent half-year report, Transurban reported growth of 2.7% in Average Daily Traffic (ADT) and 9.8% growth in EBITDA. As a result, they were able to increase distribution guidance by 5.4% to 59cps.
Transurban also has a competitive advantage. No other company can truly compete with them in the toll-road space in Australia because of their size and networks. This should ensure revenue continues to flow for many years to come.
However…
The 1H19 report also showed that profit from continuing operations actually fell 56%. This was due to an increase in depreciation and amortisation, a lower income tax benefit and higher construction and road operating costs.
Further, the toll revenue growth rate has been decreasing since 2015 when it was 39.6%. Increases in toll revenue for Transurban typically come from increasing prices or building more toll roads, not from increased traffic.
And that brings us to the one problem.
Where’s The Traffic?
Yes, Transurban did report slight increases in ADT for 1H19. But the below graph shows that the estimated car kilometres per capita have actually been decreasing since 2004.
While that has been happening, the estimated rail passenger kilometres per capita have been increasing in Sydney and Melbourne. Passengers seem to be switching to different modes of transport, likely due to congestion on roads or environmental concerns.
As more and more commuters switch to public transport, this will inevitably mean less traffic on toll roads. There are also several ride-share companies that could reduce the number of vehicles on roads.
This graph shows that the number of people in the 16-29 age bracket with a driver’s license has been steadily decreasing since around 2011. These are all trends that could impact Transurban’s bottom line in the future.
Summary
I’m not saying that Transurban is a sell, and they’re going to go out of business. However, there are some real risks to consider going forward, including the amount of traffic on toll roads and its revenue growth potential. These can’t be ignored.
While I think Transurban will be fine in the short-term, there may be better options for long-term growth and dividends. For example, Sydney Airport Holdings Ltd (ASX: SYD) is one company I think will fare better in the long term, and it currently has a higher dividend yield. You can read more about Sydney Airport here.
Alternatively, if you’re looking for more dividend + growth shares to consider buying today, grab a copy of our free report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
