Where Will TransAlta Corporation Go From Here?

With a fantastic run behind it, will TransAlta Corporation (TSX:TA)(NYSE:TAC) keep running?

| More on:
The Motley Fool

Since November 15, shares of TransAlta Corporation (TSX:TA)(NYSE:TAC) have risen from $5.20 to a current price of approximately $7.25, translating to a gain of almost 40%. By any standards, a 40% return in half of a month is excellent.

In the business of producing electricity and selling it, this is a company with consistent revenues, expenses, and, as investors would hope, consistent profits and dividends. In this particular case, however, the profit has been negative in three of the past four years. In 2016 the company has lost money in one quarter and, in total, made a profit of $0.20 YTD (year-to-date).

Looking at the demand for electricity in Canada throughout the year, it makes perfect sense that the quarterly profit for the quarter ending in March was $0.22 per share, followed by a profit of $0.02 per share in the second quarter and a loss of $0.04 in the third quarter. It is important to note the third-quarter loss was for the months of July, August, and September.

Looking at past years, the total earnings and dividends have declined steadily. For the year ending December 31, 2012, the earnings were a loss of $1.69 per share, while the company paid dividends of $1.16 per share. In 2013 things improved with a loss of only $0.35 per share and dividends unchanged. In 2014 and 2015, dividends were $0.72 per share and earnings were $0.49 in 2014 and a loss of $0.65 in 2015.

An important saying in financial markets is, “The trend is your friend.”

As is very clear from the past five years of data, the company is in a clear downtrend. For 2016, the dividend has been $0.04 per share per quarter. It has never been lower since the company came to the public market in 1999.

Currently trading at a price-to-earnings ratio close to 2,000 times, this investment should not be of interest to value investors. At a price of $7.25 per share, the dividend yield is no more than 2.25%. What looked like fantastic opportunity at $5.20 is no longer.

The rationalization for purchasing today would be the tangible book value. After removing goodwill, the company is worth $10.23 per share. The conundrum faced by management and investors in turn is the trend of losses suffered by the company.

In the case of TransAlta Corporation, the trend is clearly negative. The earnings per share are not increasing, the revenues have not increased, but the shares outstanding have increased year after year. In 2012, there were almost 255 million shares outstanding. It has grown to almost 288 million as of the end of the third quarter.

Conclusion

Although the company is in a highly consistent business, the reality is, the revenues and profit have not been increasing in a way we need to see before committing our capital. With a dividend yield under 3%, this investment is one which will have to wait.

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 Ryan Goldsman has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »