High dividend yield of 6.08%
In the first six months of 2015, Northland Power Inc.‘s (TSX:NPI) dividend payout ratio was 102% (dividends were 102% of free cash flow) compared to 86% in the same period last year. Due to heavy capital spending on the company’s two offshore wind projects in Europe, Gemini and Nordsee, the payout ratio is expected to remain above 100% until 2017, at which time these projects will be completed and the company will experience a bump up in EBITDA.
In the meantime, management is committed to maintaining the dividend and has enough liquidity to bridge the gap. The company has a good track record in this regard; the payout ratio was much higher in the 2009-2014 period, and the dividend was maintained.
Here are the reasons why, in my opinion, Northland Power will not only be able to maintain its dividend, but will also thrive in the long term, resulting in attractive capital appreciation as well.
Diversification
Northland Power is a well-diversified, clean-energy company that offers exposure not only to solar power, but also to wind and thermal power. Renewable energy sources have experienced, and will continue to experience, rapid growth as governments are pushing clean energy, and as clean energy has become more competitive in terms of cost.
Northland is participating in this shift. It is expanding its footprint locally as well as globally, becoming a bigger player in the fast-growing wind and solar energy businesses. The company estimates that by 2018, 61% of EBITDA will be from its offshore wind segment, 18% will be from its thermal power segment, 8% will be from its solar power segment, and 7% will be from the onshore wind segment.
Power generation MW to increase by approximately 50%
Northland has 698 MW of projects currently under construction. This compares with its current 1,332 MW in operation. With Gemini and Nordsee currently on schedule, the expectation is that in 2017 we should expect to see a big jump in revenue and cash flow numbers due to the increase in MW generated.
High insider ownership
Management is heavily invested in the company, so they are very much aligned with shareholders. In total, insiders own 39% of the shares outstanding.
While Northland is facing all the risks associated with high debt levels and big, capital-intensive projects, the company’s track record is excellent, and the closer Gemini and Nordsee get to being completed, the more de-risked they will be, and consequently, the more we can expect the stock price to start inching higher.
