Updated on June 24th, 2020 by Nate Parsh
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 an exceptionally high dividend yield of more than 6%. You can see the full list of the more than 200 stocks with 5%+ dividend yields here.
Beyond its high dividend yield, TransAlta Renewables is also quite unique because it pays monthly dividends, instead of the traditional quarterly distribution schedule. There are just 56 monthly dividend stocks.
You can download our full list of monthly dividend stocks (along with relevant financial metrics like dividend yields and payout ratios) which you can access 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 of ~$2.7 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 44 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 94% of total cash flow generation. Hydro and solar are much smaller and generate just 6% of cash flow generation combined.
Source: Investor presentation, page 14
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, 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.
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, page 10
The company’s dividend has grown at an annual compound rate of 4% 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 $0.69 per share, representing a 6.5% 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 down almost 12% year-to-date thus far in 2020, which is an under performance compared to the stock’s returns last year. TransAlta Renewables returned more than 56% in 2019, a massive and uncharacteristic rally in the stock. The plus side to the decline in share price this year, is that the stock now has a much more attractive yield than it did for most of 2019.
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.
Last year, the payout ratio was 73% for earnings and 85% for distributable cash. The payout ratios were slightly higher for both earnings and distributable cash. While these payout ratios are elevated, they are not too far out of the norm for TransAlta Renewables.
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 the non-GAAP metric Cash Available For Distribution.
Shares have decreased slightly this year following 2019’s rally. Investors looking for a safe monthly dividend from the energy sector could do well owning TransAlta Renewables.