Northland Power Inc. (TSX:NPI) could be the best renewable energy stock that’s flown under the radar of the average Canadian investor.
Shares trade at a mere 17.7 times forward earnings and currently offer an attractive 5.24% dividend yield with a TTM payout ratio of ~118%, which may seem stretched to some, as a handful of investors may be wondering whether or not Northland Power’s dividend is safe. Triple-digit payout ratios may not be a good sign, however; they can also be misleading when considering dividend sustainability.
The dividend is not only safe, as ~98% of the company’s revenues come from long-term contracts, but also extremely reliable and will likely remain intact even if the markets were to implode tomorrow. Moreover, many contracted developments are slated to come online over the next few years that will reduce the payout ratio and leave ample room for a potentially generous – and overdue – dividend hike. Given the company’s expanding growth pipeline, I’d be very surprised if a generous dividend hike isn’t announced over the next year that sends the yield closer to 6%.
An influential insider buy that income investors should be aware of
These days it’s rare to witness a stock with insider buying activity that overwhelms insider selling activity; thus, I believe that such activities warrant a second look from investors who are looking for value and income in a turbulent market.
The chair of Northland Power, James C. Temerty, has been backing up the truck on common shares lately. His buying activity is remarkable, and further confirms my bullish stance on a company that’s lacked momentum, unlike some of its peers in the space. Although the stock has been trading sideways for a considerable period, I believe shares could pop over the next year or so as the company continues to put its foot on the pedal with its contracted projects.
Patient investors will be rewarded
Two offshore wind projects (Gemini and Nordsee One) are completed and slated to come online in the latter part of next year. It’s really just a matter of time before the cash floodgates open, and unlike many high-yield pipeline plays, there are vastly fewer uncertainties that will stand in the way of these projects. Therefore, at these levels, Northland appears to be a much lower-risk play than many contracted pipeline firms that will likely continue to experience difficulties with project approvals.
What makes Northland Power unique is that it has one of the most geographically diversified portfolios of renewable assets out there. The company isn’t just staying within the confines of North America; renewable energy projects are in high demand across the entire globe! And Gemini isn’t letting borders stand in the way of its ambitious growth plans, as it aims to become a meaningful contributor in the global effort to accelerate the transition to sustainable energy.
Most recently, Northland Power has set its sights on Taiwan, winning a contract that opens a huge window of opportunity for numerous potential wind projects as the Taiwanese government pushes to phase out the island nation’s reliance on nuclear energy. I’m a raging bull on this development, as it will likely lead to numerous projects for many years to come, further adding to the company’s predictable cash flow stream.
Bottom line
Northland Power is an incredibly low-risk/high-reward play that’s suitable for most long-term income investors. The stock has a high-growth ceiling, and although dividend raises have been few and far between, I think the frequency and magnitude could really start to pick up over the next five years.
Stay hungry. Stay Foolish.
