Stock Market Smarts: Blow Wind, Blow!
Looking for a socially responsible investment with good cash flow? Here’s an idea – but watch out for the risk
The other night at the dinner table the conversation got around to the latest United Nations report on climate change. Why, asked a recent university graduate, isn’t Canada doing more to cut greenhouse gas emissions, for example by expanding wind power resources?
One answer is that it has yet to be proven that wind farms can consistently deliver power on a cost-effective basis. The idea of clean energy from an inexhaustible source is attractive, unless someone’s planning to build a wind farm in your back yard. But doing it profitably without massive government subsidies has turned out to be an elusive goal.
One company that is trying hard to make it all work economically is TransAlta Renewables Inc. (TSX: RNW, OTC: TRSWF). This is a new operation, spun out of parent TransAlta Corp. (TSX: TA, NYSE: TAC) in an initial public offering just over a year ago. I think it has a promising future in this era of growing interest in clean energy and the high yield offered by the stock makes it a good fit for some income portfolios. But it does not come without risk. Here are the details.
TransAlta Renewables Inc.
Type: Common stock
Trading symbols: RNW, TRSWF
Exchanges: TSX, Grey Market
Annual payout: $0.77
Yield: 6.3 per cent
Risk Rating: Higher risk
Financial highlights: Third-quarter financial results were disappointing. Revenue came in at $42.6 million, down slightly from $43.5 million in the same period of last year despite a small increase in production. The company recorded a small loss and cash available for distribution was only $6.1 million ($0.05 per share). RNW paid out $0.19 a share in dividends over the quarter so that situation is obviously not sustainable long-term.
For the first nine months of the fiscal year, net earnings were $27 million ($0.24 per share) while cash available for distribution was $45.9 million ($0.40 per share). Dividends paid totalled $0.58 per share.
Based on these numbers, it is clear that the company needs to improve its cash flow and bottom line if the dividend is to be sustainable. Drop-downs from parent TransAlta will be needed to achieve that.
Risks: The major risk is that TransAlta will delay or decide against accretive drop-downs in the near future. That would leave Renewables vulnerable to a possible dividend cut. That is not seen as a likely scenario but investors should be aware of it.
Higher interest rates would also cause a problem. They would drive up the carrying costs of any financing used to pay for acquisitions and could have a depressing effect on the share price.
Distribution policy: The stock currently pays a monthly dividend of $0.0641 per share ($0.77 a year).