Renewable utilities have decades of growth ahead of them as the world transitions to green energy. It’s even better for investors when you get paid well to wait for the growth that could lead to substantial wealth creation via price appreciation. Let’s explore TransAlta Renewables (TSX:RNW) and Northland Power (TSX:NPI) to see which may be a better dividend buy.
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The businesses
TransAlta Renewables has about 2,991 megawatts (MW) of gross installed capacity across 48 facilities in Canada (about 67% of capacity), the United States (18%), and Australia (15%). It targets highly contracted power generation to make sustainable cash flow generation.
At the end of the first quarter (Q1), its portfolio had a weighted average contract life of 11 years. Its Canadian wind portfolio makes up about 73% of its long-term average renewable energy production, followed by its U.S. wind and solar portfolio of 24%. It also has six gas plants in Australia and one each in Canada and the U.S.
Northland Power has approximately 3,026 MW of gross production capacity, primarily in wind generation: 39% in offshore wind, 28% in onshore wind, 9% in solar, and 26% in natural gas.
Dividends
Currently, TransAlta Renewables pays a monthly dividend that equates to an annualized payout of close to $0.94 per share. This is a high dividend yield 7.4% at $12.70 per share at writing. It has maintained the same monthly dividend since September 2017. Its free cash flow payout ratio in Q1 was 66%. To be more stringent, its payout ratio was about 85% based on the cash available for distribution per share.
At writing, Northland Power pays a monthly dividend of $0.10, equating to an annual payout of $1.20 per share. This is a dividend yield of 4% at $30.12 per share. It has kept the same dividend since December 2017. Based on the dividends declared in Q1, its payout ratio was 49% of free cash flow.
2023 outlook
TransAlta Renewables management provided 2023 guidance with the midpoints as follows:
- Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), a cash flow proxy, of $515 million (up 5.7% versus 2022)
- Free cash flow of $360 million (an increase of 3.7%)
- Cash available for distribution (up 2.9%)
It’s unlikely for the company to increase its share count in today’s environment. So, it’s pretty safe to extend these estimates on a per-share basis.
Northland Power expects to be on track to achieve its full-year financial guidance. However, based on the midpoints of its targets, it means an 11% decline in its adjusted EBITDA to $1.25 billion and down 13% in its free cash flow per share to $1.40.
Investor takeaway
TransAlta Renewables offers a high dividend yield of 7.4%, but analysts think the stock is fairly valued. It is unrated by S&P and has a debt to long-term capital of 27% and debt to equity of 80%.
Northland Power offers a nice dividend yield of 4%. Additionally, analysts think the dividend stock is undervalued by 28% with 12-month upside potential of about 40% to $41.97 per share. It’s also awarded an investment-grade S&P credit rating of BBB. It has a debt to long-term capital of 55% and debt to equity of 1.89 times.
Despite paying a lower dividend yield, Northland Power stock has outperformed TransAlta Renewables by about 2.7% per year in the last decade. We think Northland Power has the potential to outperform over the next five to 10 years — particularly if the related central banks revert to a cycle of declining interest rates. That said, in the same decade, TransAlta Renewables did pay about 22% more in dividend income. So, if you’re purely seeking income, you can dig deeper into RNW as a potential better dividend buy.
