Monthly Dividend Stock In Focus: TransAlta Renewables - Sure Dividend

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Monthly Dividend Stock In Focus: TransAlta Renewables

Updated on April 28th, 2022 by Aristofanis Papadatos

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 5.3%.

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

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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 of $3.8 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.

The company has maintained or increased its dividend every year since 2014, by an average growth rate of 3% per year. TransAlta Renewables owns 13 hydro facilities, 26 wind farms, 8 natural gas plants, 1 battery storage project and 2 solar assets. In total, the company owns directly or through economic interests, an aggregate of 2,968 megawatts of gross generating capacity in operation.

TransAlta attempts to grow over the long-term by focusing on renewables and gas-fired power generation. It thus benefits from the secular shift of most countries from fossil fuels to clean energy sources. Even better, this shift has greatly accelerated since the onset of the pandemic.

TransAlta has strong internal cash generation, which allows the company 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.

Given the market capitalization of $3.8 billion of the stock, it is evident that TransAlta has invested heavily in its growth projects.

TransAlta has also proved resilient throughout the coronavirus crisis. In contrast to most oil companies, which incurred hefty losses in 2020 due to a collapse in the global demand for oil products, TransAlta posted a benign 12% decrease in its funds from operations per share, from $1.13 in 2019 to $0.99 in 2020.

The company partly recovered in 2021, growing its funds from operations per share from $0.99 to $1.05. However, it is currently facing an unexpected headwind, as it has suffered a tower collapse at the Kent Hills 1 and 2 wind sites.

After careful inspection at the sites, the company determined that both sites need a full foundation replacement, which will be completed no earlier than the end of 2023. The replacement will cost $75-$100 million. On the bright side, management has provided guidance for 9% growth of adjusted EBITDA this year.

Moreover, TransAlta has promising growth prospects in the long run thanks to the secular growth of clean energy sources. Organic growth is a future catalyst, as well as acquisitions. In 2021, the company acquired several renewable energy plants.

On the other hand, TransAlta has a somewhat volatile performance record, primarily due to highly unpredictable depreciation of its assets as a result of its excessive investments.

In addition, the issuance of new shares, which are used to fund the excessive investments of the company, have provided a headwind to growth of the bottom line. As a result, we expect 3% average annual growth of funds from operations per share over the 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.

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 $0.75 per share, representing a 5.3% 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.

The stock of TransAlta plunged during the broad market sell-off, which was caused by the onset of the pandemic in early 2020, but it has now retrieved all its losses.

The company has steadily grown its cash available for distribution since its IPO. In 2018, the payout ratio in terms of earnings was 71%, and 82% using distributable cash. Using distributable cash, the payout ratio was 71% in 2020 and 66% in 2021. For 2022, we expect a payout ratio of approximately 74%.

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

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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