Clean Energy, Strong Dividend: TransAlta Renewables Inc. Is a Lasting Legacy

TransAlta Renewables Inc. (TSX:RNW) comes in two shades of green: clean and money.

| More on:
The Motley Fool

TransAlta Renewables Inc. (TSX:RNW) is one of the largest clean energy providers in the world. It is the child that its parent company TransAlta Corporation (TSX:TA)(NYSE:TAC) spun out in 2013 at $10 dollars per share.

TA Corp. endowed its offspring with all the clean energy components from its energy portfolio: natural gas generators, wind farms, hydroelectric assets, and a natural gas pipeline.

TA Renewables has proved a prodigy since its inception, steadily eddying up its stock price to a $13.60. It has raised its annual dividend payment every year and currently sports a very generous 6.7% common share dividend.

TA Renewables has been awarded a higher market capitalization than its parent with a valuation of $3 billion. TA Corp. trades at $7 and change and pays a 2.22%, yet its market capitalization is only $2 billion, but TA Corp. owns 60% of TA Renewables’s common shares.

Huh? Do the math: 60% of $3 billion is $1.8 billion. So, TA Corp. is essentially trading just for the value of its stake in TA Renewables.

What does this mean?

This means that TA Renewables represents the future of the energy business. The 20% operating margins it enjoys on its modern, green energy products makes it the company and the stock of the future.

Its old-school energy firm parent company TA Corp., is not as economically viable as TA Renewables with a meagre 2.5% operating margin as it struggles selling “dirty” energy products.

It also means, funnily enough, that TA Corp. is achingly cheap. The market is not granting the energy company any value for its legacy energy assets other than for its humongous TA Renewables stake.

Don’t forget, TA Corp. is a 60% common shareholder in TA Renewables. Therefore, it will receive about $115 million from TA Renewables this year in dividend payments. Remember this company’s history is one of growing dividends every year since its inception.

So, when the child TA Renewables prospers, so does the parent TA Corp. In fact, TA Corp. will be subsidized until 2030 to the tune of $37 million dollars a year by the Alberta Government for the premature closure of its coal plants. Ironically, the future looks brighter and greener for this fossil fuel dinosaur.

It must be noted that in the event of a future takeover of TA Renewables, both TA Renewables’s and TA Corp.’s shares would enjoy a hefty premium.

I believe both companies are fantastic buys at these price levels. I would buy two-thirds of my purchase dollar amount in TA Renewables shares and place the rest of my money (the other 33% of my buy) on undervalued TA Corp. shares.

If one purchased the stocks in these fractions, the blended annual dividend the investor would receive would be about 5.3%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Drew Currah has no position in any stocks mentioned.

More on Energy Stocks

Natural gas
Energy Stocks

Canadian Natural Resources Stock (TSX:CNQ): Profiting From Natural Gas Strength

Soaring cash flows and dividends have come to characterize Canadian Natural Resources stock as well as other natural gas stocks.

Read more »

oil and natural gas
Energy Stocks

Oil Stocks: The Next 3 Months Are Key

Oil stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU) are reporting earnings soon. There are two other big events happening, too.

Read more »

Oil pumps against sunset
Energy Stocks

Want Monthly Passive Income? These TSX Dividend Stocks Are for You

Create a passive income stream with monthly paying dividend stocks on the TSX such as Pembina Pipeline and Freehold Royalties.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Why Suncor Energy Stock Could Lose its Underperformer Tag Soon

So far this year, SU stock has gained 21%, while TSX energy stocks at large have gained 38%.

Read more »

money cash dividends
Dividend Stocks

Canadian Investors: Where to Put $100 Right Now

Canadians with $100 to invest can put their money to work in three low-priced, dividend-paying TSX stocks.

Read more »

Dice engraved with the words buy and sell
Dividend Stocks

Not Every Cheap Stock has Value: 1 Stock to Buy, 1 to Sell, and 1 to Hold

The market downturn has created an opportunity to buy value stocks at a bargain. Here’s a guide to optimizing your…

Read more »

Upwards momentum
Energy Stocks

Gold and Energy: Here Are Two of the Best Stocks to Buy Now

Gold and energy stocks are some of the best to buy now for very different reasons.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Here’s Why I’m Buying the Dip in Suncor (TSX:SU) Today

Suncor Energy Inc. (TSX:SU)(NYSE:SU) stock is worth buying, even as oil and gas prices have softened in the second half…

Read more »