Should You Buy Capital Power Stock for its 6.5% Yield?

Capital Power (TSX:CPX) stock has shares down 23% in the last year, but could see them surge after a major purchase. But is the dividend safe?

| More on:

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

dividends grow over time
Dividend Stocks

3 Canadian Stocks That Have Doubled Their Dividends Over the Last 5 Years

These three Canadian stocks could strengthen your portfolio, given their solid underlying businesses and consistent dividend growth.

Read more »

Dividend Stocks

Invest $15,000 in This Dividend Stock for $995 in Annual Passive Income

Whitecap Resources pays shareholders a monthly dividend of $0.061 per share, which adds up to a forward yield of over…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Dividend Stocks

Here’s the Average RRSP Balance at Age 69 in Canada

Holding index funds like the iShares S&P/TSX 60 Index Fund (TSX:XIU) in your RRSP can pay dividends in retirement.

Read more »

dividend growth for passive income
Dividend Stocks

Passive Income Seekers: Get $67 Deposits Every Month With a $10,000 Investment in This Fund

Here's the math on how much a $10,000 investment could generate in passive income every month.

Read more »

jar with coins and plant
Dividend Stocks

2 Dividend Growth Stocks Canadians Should Watch in October

Dividend growth stocks are the best way to earn income and substantial capital gains. Here are two high quality dividend…

Read more »

bulb idea thinking
Dividend Stocks

The Smartest Dividend Stocks to Buy With $2,000 Right Now

With interest rates now declining and the economic environment improving, here are two of the smartest dividend stocks to buy…

Read more »

a person looks out a window into a cityscape
Dividend Stocks

Better Monthly Paying REIT: NorthWest Healthcare Properties or RioCan?

With both REITs offering over 5.5% dividend yields, let’s assess which of the two would be a better buy right…

Read more »

An analyst uses a computer and dashboard for data business analysis and Data Management System with KPI and metrics connected to the database for technology finance, operations, sales, marketing, and artificial intelligence.
Dividend Stocks

Build a Tax-Free Passive Income Portfolio With Just $25,000

Enjoy a tasty and growing yield, alongside capital gains, with these quality dividend stocks in your TFSA.

Read more »