Shares of Capital Power (TSX:CPX) haven’t been the best-performing ones out there on the TSX today. Yet that lower share price has brought along with it a 6.47% dividend yield as of writing. But what’s been going on with the Capital Power stock these days, and should investors perhaps now consider the dividend stock once more?
What happened?
Shares of Capital Power stock fell earlier this year after poor earnings came in far below earnings estimates. Yet even as the latest earnings results came in far stronger than estimates, the company has struggled to recover.
During the most recent earnings report, the power company made several strong announcements that had investors and analysts at least a little interested. The stock announced adjusted funds from operations (AFFO) at $296 million, with earnings before interest, taxes, depreciation and amortization (EBITDA) at $410 million.
The issue was that the company was trending lower than where it hoped to be for its 2023 full-year guidance. That’s in terms of EBITDA and AFFO for the year. This comes from lower realized prices, despite strong fleetwide performance, according to management, which is perhaps why some more moves came down the pipeline.
Acquisition station
Just under three weeks later, Capital Power stock announced it would be purchasing two “quality assets” for $1.1 billion all in. The two gas facilities in California and Arizona were marked as critical infrastructure for gas production. And right now, it could offer the company the growth it’s been seeking.
Not only did the purchase seem like a good deal to management, but it also provided immediate funds. Both purchases should therefore strengthen the company’s EBITDA and AFFO for the year — perhaps even bring it in line with its outlook after all.
Even so, investors weren’t thrilled to hear about spending after earnings that saw lower results for the year. Shares dropped 6% at the news of the deals. So, what now for the company?
Is the yield worth it?
What did analysts think of these recent moves? Far more positive than investors, that’s for sure. Analysts had a resounding positive reaction to the “transformative” deals. Capital Power stock will be able to take these mid-life natural gas companies with strong finances and make immediate use. After closing, the company will become the fifth-largest independent natural gas power producer in North America.
Furthermore, this acquisition provides more diversification for the company. Its Alberta exposure will be less than 35% from 45% after the acquisitions. And with both California and Arizona continuing to see massive population growth, it couldn’t be a better time.
Analysts now believe that Capital Power stock should outperform over the next several years. And that could be far beyond its AFFO average through 2028, analysts say, as the company could decarbonize these facilities to develop renewable energy as well.
Bottom line
While right now the purchase might seem like a large one, and indeed it is, there is a longer play here. Capital Power stock has diversified its holdings, bought for value, and has assured AFFO for the near and distant future. So, as shares are down 23% in the last year, and while trading at 10.63 times earnings, that 6.47% dividend yield looks pretty good to me.
