Should risk-averse investors consider investing in boring utility stocks? The answer is a resounding yes because of a perfect formula: Utility Stocks = Defence + Dividends. As of this writing, the utility sector is the fourth-best performer (+3.53% year to date) out of 11 primary sectors.
High-yielding TransAlta Renewables (TSX: RNW) and Capital Power (TSX: CPX) are the compelling options in June 2023. The former pays a lucrative 7.72% dividend with a monthly payout frequency, while the latter is a Dividend Aristocrat that yields 5.17%.
Largest generator of wind power
TransAlta’s 10.4% market-beating return year to date ($11.95 per share) confirms the defensive nature of the dividend titan. The $3.18 billion renewable power-generation company is one of Canada’s largest generators of wind power. It operates in three countries, directly owning Canadian assets and has economic interests in the U.S. and Australia.
The owned assets (wind & solar, hydro, and gas) in Canada have a combined gross installed capacity of 1,995 megawatts (MW), while the economic interests generate 998 MW. In the first quarter (Q1) of 2023, revenue declined 16.8% to $119 million year over year, while net earnings increased 9.8% to $45 million versus Q1 2023.
According to management, investors should know that business results fluctuate with seasonal variations. The first and fourth quarters produce the most significant wind volumes, whereas hydro volumes are high in the second and third quarters. TransAlta also focuses on realizing incremental growth through the expansion of existing assets.
Most renewable assets and gas projects provide contracted cash flows because of the long-term power-purchase agreements. Management commits to allocating a significant amount of cash available for distribution (CAFD) for monthly dividend payments.
The established long-term service agreements with suppliers enable TransAlta to stabilize operations and maintenance costs. For 2023, management targets $340 million to $380 million free cash flow (FCF) and CAFD between $230 million and $270 million.
TransAlta is confident that its highly contracted renewable and natural gas power-generation facilities and other infrastructure assets will provide stable, consistent shareholder returns. Moreover, the investments provide stable cash flow through long-term contracts with strong counterparties.
Nine-year dividend-growth streak
Capital Power is a Dividend Aristocrat owing to nine consecutive years of dividend increases. The current share price is $45.89 (-1.8% year to date), and market analysts have a 12-month average price target of $51.85%. Your potential upside or overall return could be more than 15.5%, including the dividends.
The $5.23 billion growth-oriented independent power producer owns renewable and thermal power-generation facilities. Its 29 facilities have a combined power generation capacity of 7,500 MW. Management said Capital Power is well positioned to support a low-carbon energy system.
In Q1 2023, revenues and other income soared 152.9% year over year to $1.26 billion, while net income jumped 139.5% to $285 million. There were notable highlights during the quarter, including the appointment of Mr. Avik Dey as the new president and chief executive officer.
Capital Power also obtained a six-year contract extension from Ontario IESO and signed a 23-year clean electricity supply agreement for the Halkirk 2 Wind Project. Management’s immediate plan is to expand the utilization of renewable energy and employ storage technologies to optimize renewable sources.
The ultimate goal is to transition to lower- and zero-carbon thermal generation with improved efficiency and minimal emissions.
Green portfolio
TransAlta and Capital Power should be on the radars of environmental, social, and governance investors. Besides creating a green portfolio, you can earn two ways from these growth stocks: price appreciation and dividends.
