Monthly Dividend Stock In Focus: TransAlta Renewables - Sure Dividend

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Monthly Dividend Stock In Focus: TransAlta Renewables


Updated on June 21st, 2021 by Bob Ciura

The renewable energy industry is not well-known for recession-resistant businesses. Companies in the sector tend to be unprofitable and typically do not pay dividends to shareholders.

Many investors might avoid the renewables industry as a result, but TransAlta Renewables (TRSWF) is an under-appreciated company in renewable energy. TransAlta is attractive for dividend growth investors for a number of reasons. First, it has a high dividend yield of more than 4%.

Beyond its high dividend yield, TransAlta Renewables is also quite unique because it pays monthly dividends, instead of the traditional quarterly distribution schedule.

You can download our full list of 53 monthly dividend stocks (along with relevant financial metrics like dividend yields and payout ratios) by clicking on the link below:

 

TransAlta Renewables’ high dividend yield and monthly dividend payments are two big reasons why this company stands out to income investors.

That said, proper due diligence is still required for any high yield stock, to ensure that its payout is sustainable.

Business Overview

TransAlta Renewables is a renewable energy infrastructure company headquartered in Calgary, Alberta.
With a market capitalization above $4 billion, TransAlta is Canada’s largest producer of wind energy and is one of the country’s largest producers of renewable energy as a whole.

The stock is listed in New York and Toronto.

Its history in renewable power generation goes back more than 100 years. In 2013, the company was spun off from TransAlta, who remains a major shareholder in the alternative power generation company.

Source: Investor Presentation

The company has maintained or increased its dividend every year since 2014, by an average of 4% growth per year. TransAlta Renewables owns 13 hydro facilities, 23 wind farms, 7 natural gas plants, 1 battery asset and 1 solar asset. In total, the company owns directly or through economic interests, an aggregate of over 2,500 megawatts of gross generating capacity in operation.

TransAlta attempts to grow over the long-term by focusing on renewables and gas-fired power generation. The company has strong internal cash generation that allows it to invest strategically over time to build out its portfolio. These investments provide the company with a positive growth outlook.

Growth Prospects

TransAlta’s track record of growth has been quite strong. The company has consistently grown capacity over the past several years, thanks to its investments in wind, solar, and hydro assets.

Source: Investor Presentation

TransAlta has made more than $2.7 billion (in U.S. dollars) in investments since it began operations as a standalone entity a handful of years ago.

TransAlta Renewables has generated strong financial results in recent periods. TransAlta Renewables reported its first quarter results on May 12th. Renewable energy production dipped to 1,109 GWh compared to 1,173 GWh in the same prior year period. Despite this, revenues of USD $104 million increased 15% year-over-year, in constant currency.

Comparable EBITDA increased 4% while FFO was in-line with the same quarter last year. Cash available for distribution was also identical to the prior year period, at $0.28 per share.

Organic growth is a future catalyst, as well as acquisitions. For example, in the first quarter, the company completed previously announced acquisitions of a 303 megawatt asset portfolio from its parent company, TransAlta Corporation, which includes 274 MW of wind capacity.

For 2021, TransAlta Renewables expects comparable EBITDA between $480 to $520 million, which would represent 8% growth at the midpoint. We expect to see 2% annual FFO-per-share growth over next five years.

Dividend Analysis

TransAlta Renewables’ dividend is obviously a sizable draw for investors given that the yield is so high. In addition, since this is not necessarily a growth company, total returns will be highly reliant upon the dividend in coming years.

Source: Investor Presentation

The company’s dividend has grown at an annual compound rate of ~3% since the IPO in 2013 and today, stands at $0.94 per share annually in Canadian dollars. In U.S. dollars, the annualized dividend payout is approximately $0.76 per share, representing a 4.6% dividend yield.

Note: As a Canadian stock, a 15% dividend tax will be imposed on US investors investing in the company outside of a retirement account. See our guide on Canadian taxes for US investors here.

Shares are up over 50% in the past year, a massive and uncharacteristic rally in the stock.

The company has steadily grown its cash available for distribution since the IPO. In 2018, the payout ratio in terms of earnings was 71%, and 82% using distributable cash. For 2021, we expect a payout ratio of approximately 67%.

With this in mind, we see the payout as safe for the foreseeable future. There could even be room for continued dividend growth, as the company’s growth investments come online and contribute to cash flow growth.

Final Thoughts

TransAlta Renewables’ high dividend yield and monthly dividend payments are immediately appealing to income investors such as retirees. However, due diligence is required to ensure that such a high dividend yield is sustainable.

This analysis suggests that the company’s dividend is very safe, as measured by Cash Available for Distribution or Funds From Operation.

Shares have increased significantly in price over the past year. While this has rewarded existing shareholders, it makes the stock less appealing for new investment due to its higher valuation and lower dividend yield.

That said, investors looking for a safe monthly dividend from the renewable energy industry could do well owning TransAlta Renewables.

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