Utility stocks are becoming far more popular these days, and for many reasons. For one, a utility stock can provide protection during a downturn. No matter what happens in the markets, we need these companies to provide the power to our daily life.
This stability is unlike that provided by the oil and gas sector, which depends on transportation rather than just power alone. And with the world shifting towards renewable energy, utility stocks are a breath of fresh air for investors.
Yet among them all, the top Canadian utility stock I would consider today is TransAlta Renewables (TSX:RNW).
Tough past, bright future
TransAlta stock went through a rough few years as it managed to convert its coal plants into both natural gas and renewables. It has done well in this transition, providing investors with renewed hopes about the future of the company.
Those hopes depend mainly on the future performance of the company, as presently there is a bit to be desired. Analysts lowered their price targets recently, especially as there was “weak wind” in Alberta, Ontario, and the United States for the company’s wind farms.
That being said, TransAlta stock isn’t just sticking to its current assets. The company has also expanded through acquisitions again and again, helping to offset thet recent poorer performance. Its developments also seem on track, with its Northern Goldfields project expected to be complete by the third quarter. Its Mouth Keith transmission expansion should also see completion by the end of 2023, and its Keith Hills project is partially up and running.
TransAlta stock missed the last several earnings estimates, but the last miss was by a smaller margin. There might be hope for a future quick recovery for this stock, but only if there is an earnings surprise.
During the last report, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) fell to $128 million, down $11 million from the year before. Higher expenses and lower wind production led to those lower results, with free cash flow falling by $15 million.
While most items were down, it seems as though these were from one-off events. Further, more growth is in the works, providing a far better long-term option for investors who want to buy while the stock is down. And with earnings next month, it couldn’t be a better time.
TransAlta stock now has a dividend yield at 8.55% as of writing with shares down 26%, year to date. And while all these numbers look pretty bad, it retains at a debt-to-equity (D/E) ratio of just 44.5%. Therefore, the company can cover its debts with equity even at these levels.
TransAlta stock looks like a company that’s going through hard times, with far more coming in the future. Utilities are some of the best places to look for stability, but TransAlta stock may provide growth. It’s now far too undervalued, with investors creating a sell-off in the still relatively strong stock. So if you’re looking to take advantage of its high yield, now might be the time.