In these uncertain times, a regular dividend payment gives investors great comfort. Utility companies are known for predictable revenues and stable cash flows, which makes it easier for them to maintain and grow dividends; that’s a big deal in today’s volatile world.
Capital Power (TSX: CPX) is a North American power producer that deploys both renewable sources of energy as well as fossil fuels. The company owns over 6,400 MW of power generation capacity at 28 facilities across North America.
Capital recorded net income of $23 million and adjusted EBITDA of $217 million for the second quarter of 2020. It also announced a 6.8% increase in its dividend payout when it reported its results for the second quarter of 2020. This is the seventh year in a row that it has hiked dividend payments, and this increment now means it has a high forward yield of 7.2%.
Capital Power also stands by its guidance of increasing the dividend payout by 7% in 2021 and 5% in 2022. It’s rare to see a company have the confidence to stand by predictions for the future at a time when everyone is withdrawing guidance until there is clarity on a post-pandemic world.
No slowing down for this dividend giant
Capital Power hasn’t slowed down expansion plans in the last quarter. The last two months saw two renewable projects launch in Alberta. Phase three of the Whitla Wind facility will add 54 MW in 2021 at a capital cost of $92 million. At 353 MW of generation capacity, Whitla Wind will be Alberta’s largest wind facility when all three phases are completed by the end of 2021.
The company also announced its first solar project in Canada, Strathmore Solar, which will add 40.5 MW in 2022 at a cost of between $50 million and $55 million. The company expects average annual adjusted EBITDA and adjusted funds from operations for the project to be around $5 million over the first five years.
This is a major step for Capital, as it has been cautious when it comes to solar projects. The company says it didn’t believe it was competitive enough until it launched Strathmore.
Capital Power has an annual budget of $500 million to deploy for growth. This year, it has utilized $300 million, which includes Whitla, Strathmore, and the acquisition of Buckthorn Wind in Texas. The company is gung-ho on the mergers and acquisitions play in the coming 12-18 months. It believes that the near future will throw up multiple opportunities, and the company might exceed the $500 million target.
Capital Power has re-instituted its DRIP as a measure to help finance Strathmore and M&A opportunities that might come up. Bryan DeNeve — SVP and CFO, said, “…we also believe there’s a number of potential opportunities out there that — to be a good fit for Capital Power strategically. So given the volatility of the markets, we felt it would be prudent to utilize the DRIP as a way to access some equity financing over that period. We anticipate about a 30% participation rate in it, which would generate about $16 million of equity per quarter.”
Analysts have given Capital Power a target of $33.45 — 14% upside from current levels. Add the dividend payout to it, and you are sitting on a healthy return on investment.
