Should You Buy Northland Power for its 5% Dividend Yield?

Northland Power stock trades 52% below all-time highs and offers shareholders a tasty dividend yield of 5% right now.

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In the last two years, companies part of capital-intensive sectors such as energy, utilities, and real estate have trailed the broader markets by a significant margin. Investors are worried about rising interest rates negatively impacting the profit margins, resulting in a selloff across multiple sectors.

Due to the rising cost of debt, several TSX stocks, such as Algonquin Power & Utilities and Northwest Healthcare, were forced to cut their dividends, driving share prices significantly lower. Another TSX stock that is under pressure is Northland Power (TSX:NPI), which is currently down 52% from all-time highs. But the pullback has also increased its dividend yield to 5%. Let’s see if you should invest in NPI stock for its tasty dividend yield in 2024.

An overview of Northland Power

Valued at $6.1 billion by market cap, Northland Power is an independent power producer that develops, builds, owns, and operates clean and green power projects in the Americas, Europe, and Asia. It produces electricity from clean energy sources such as wind, hydro, and solar, as well as from natural gas and biomass.

It owns or has an economic interest in 3.4 gigawatts of operating generating capacity with a significant inventory of projects in construction and various stages of development totalling 15 gigawatts of potential capacity.

Northwest Power aims to enhance shareholder value by investing in projects backed by long-term revenue contracts that deliver stable cash flows across business cycles. It has a diversified portfolio of high-quality power infrastructure assets with a weighted average contracted revenue life of more than 14 years.

How did Northland Power perform in Q3 of 2023?

In the third quarter (Q3) of 2023, Northland Power reported sales of $513 million, down from $556 million in the year-ago period. Its gross profit fell by 5% to $458 million, while adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $267 million, compared to $290 million in the last year.

Northland Power reported adjusted free cash flow per share of $0.25 in Q3. Comparatively, it pays shareholders a monthly dividend of $0.10 per share, indicating a payout ratio of more than 100%, which is not sustainable.

Northland Power has to lower its payout ratio to provide the company with enough room to reinvest in growth projects, lower balance sheet debt, and target accretive acquisitions. While its payout ratio was over 100% in Q3, Northland Power reported a free cash flow of $1.22 per share in the last three quarters, which means its payout ratio is much lower at 74%.

What is the target price for NPI stock?

Northland Power is not a dividend growth stock. For instance, its dividend payout has remained unchanged for more than six years. In the last 10 years, NPI stock has returned 47% to shareholders. After adjusting for dividends, total returns are closer to 132%.

However, Northland Power has a strong clean energy portfolio. It continues to target Europe and Asia as key markets for offshore wind development while expanding its inshore footprint in North America and Europe.

Priced at 17.7 times forward earnings, NPI stock is not too expensive if it can expand cash flows consistently over time. Analysts remain bullish and expect NPI stock to surge 33% in the next 12 months.

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 Aditya Raghunath has positions in Algonquin Power & Utilities. The Motley Fool recommends NorthWest Healthcare Properties Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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