Updated on April 4th, 2019 by Josh Arnold
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 (RNW.TO) (TRSWF) is an under-appreciated company in renewable energy.
TransAlta is attractive for dividend growth investors for a number of reasons. First and foremost, it has an exceptionally high dividend yield of 6.8%.
That is more than three times the average dividend yield of the S&P 500, and makes TransAlta Renewables a member of the short list of publicly-traded securities with 5%+ dividend yields.
Beyond its high dividend yield, TransAlta Renewables is also quite unique because it pays monthly dividends, instead of the traditional quarterly distribution schedule.
Monthly dividend payments are highly superior for investors that need to budget around their dividend payments (such as retirees).
There are just 41 monthly dividend stocks. You can download the full list of monthly dividend stocks from our database 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.
TransAlta Renewables is a renewable energy infrastructure company headquartered in Calgary, Alberta.
With a market capitalization of ~$3.6 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.
Source: Investor presentation, page 3
The company has a geographically diverse asset base, consisting of 42 properties that generate cash flow and earnings through four different means of power generation.
The two largest segments – wind and natural gas – collectively make up 93% of total cash flow generation. Hydro and solar are much smaller and generate just 7% of cash flow generation combined.
Source: Investor presentation, page 15
The company 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.
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, page 12
TransAlta has made more than $2.2 billion (in U.S. dollars) in investments since it began operations as a standalone entity a handful of years ago.
TransAlta’s investments in 2014 and 2015 were in huge, concentrated properties whereas 2018’s investments were much more diversified.
Apart from that, TransAlta has a sizable investment funnel it is evaluating for future investments to continue growing the portfolio.
Source: Investor presentation, page 16
The company has a huge growth opportunity it is evaluating in not only Australia and Western Canada, where it has a large presence, but the Pacific Northwest in the U.S. as well.
In addition, it has potential drop-down transactions from TransAlta Corporation (TA.TO) that would be worth nearly 2k MW of power.
We see TransAlta Renewables’ growth outlook as moderate given that it is profitable today with meaningful internal cash generation, but also because it has ample opportunities – and the financing capacity – to fuel future growth.
Its exposure to wind and clean fossil fuel power generation aren’t subject to the same environmental concerns as coal, for instance, so we believe TransAlta Renewables’ future is relatively secure.
We expect to see moderate levels of earnings growth in the coming years, as has been the case in recent reporting periods.
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, page 10
The company’s dividend has grown at an annual compound rate of 6% 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 $0.70 per share, representing a 6.8% dividend yield.
Shares are up ~30% YTD thus far in 2019, a massive and uncharacteristic rally in the stock. This has driven the yield down from even higher levels, but TransAlta Renewables still offers an extremely high yield after the big rally.
Source: Investor presentation, page 9
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.
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.
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 the non-GAAP metric Cash Available For Distribution.
Unfortunately, the company appears to be relatively overvalued compared to historical norms given the recent rally in the stock.
With that said, TransAlta Renewables still has appeal for investors seeking current yield that is paid out monthly.