Dividend yields and share prices are inversely related. It means when share prices fall, the dividend yield of a company rises and vice versa. So, a market selloff is the perfect time to go bottom fishing and buy quality dividend stocks at a discount to benefit from a high yield and capital gains when market sentiment improves.
Right now, debt-heavy companies, part of capital-intensive sectors, have experienced a selloff due to rising interest rates in the last 20 months. One such TSX company is Northland Power (TSX:NPI), a Canada-based clean energy company. Down 53% from all-time highs, NPI stock currently offers you a yield of 5%. Let’s see if this TSX dividend stock is a good buy right now.
The bull case for Northland Power stock
Northland Power has an economic interest in three gigawatts (GWs) of operating generating capacity. It also has an inventory of projects in various stages of development of 16 GW of potential capacity.
These projects include the following:
- A 220-megawatt (MW) of on-shore wind under construction in the state of New York
- A 60% equity stake in a 1,022-MW offshore wind project off the Taiwan coast
- A 49% stake in the 1,140-MW project off the coast of Poland
Northland aims to gain traction in the clean energy segment by owning and operating a growing portfolio of sustainable infrastructure assets. Its base of cash-generating clean energy assets derives earnings via long-term revenue contracts, allowing the company to pay shareholders an annual dividend of $1.20 per share.
Due to a sluggish economic environment and multiple macro headwinds, Northland Power’s sales fell to $513 million in the third quarter (Q3) of 2023, down from $556 million in the year-ago period. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell almost 10% to $267 million while adjusted free cash flow per share declined to $0.25 per share.
Given a quarterly dividend payout of $0.30 per share, NPI has a payout ratio of more than 100%, which is not sustainable over the long term.
Can Northland Power sustain its dividends?
Northland Power is focusing on the construction of projects in the Baltic and Taiwan regions, which should help it drive future cash flows higher. It ended Q3 with $563 million in total liquidity, which includes $63 million in cash. It also has a short-term corporate credit facility amounting to $500 million, of which it utilized $344 million at the end of Q3.
The company reiterated its outlook for 2023 and expects to end the year with adjusted EBITDA of $1.2 billion and adjusted free cash flow of $1.70 per share. So, the payout ratio for NPI is below 100% for the year, but it has to shore up its profit margins to maintain dividends, given its low cash balance.
The final takeaway
Northland Power expects to increase its power-generating capacity by 17% annually through 2027, as it aims to expand offshore development in Asia and Europe and onshore development in North America.
Priced at 17.6 times forward earnings, NPI stock is not too expensive and trades at a discount of 35% to consensus price target estimates.
