Should You Buy Northland Power Stock for its 5.4% Dividend Yield?

Down 55% from all-time highs, Northland Power stock offers you a tasty dividend yield of 5.6%. Is the TSX stock a good buy right now?

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In the last two years capital-intensive stocks have trailed the broader markets by a wide margin as investors are worried about rising interest rates. The significant uptick in interest rates has resulted in lower profit margins for debt-heavy companies.

In fact, several companies such as Algonquin Power & Utilities, Innergex Renewable, and Northwest Healthcare REIT were forced to cut their dividend payments as these payouts were unsustainable.

Another TSX stock that has underperformed in recent years is Northland Power (TSX:NPI). Valued at a market cap of $5.75 billion, NPI stock is down 55% from all-time highs, increasing its dividend yield to 5.4%.

Let’s see if NPI stock is a buy for its tasty dividend yield in April 2024.

An overview of Northland Power

Northland Power is a power producer that generates electricity from clean energy sources. It develops, builds, owns, and operates clean and green power infrastructure assets and is a global leader in offshore wind. Moreover, Northland owns and manages a diversified portfolio of assets that includes onshore renewables and supplies energy through a regulated utility.

The Canadian company has an economic interest in 3.4 gigawatts (GW) of operating capacity. Additionally, it has an inventory of projects in construction and various stages of development totalling 12 GW of potential capacity.

How did Northland Power perform in 2023?

In 2023, Northland Power reported revenue of $2.23 billion, down from $2.45 billion in 2022. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $1.24 billion in 2023, compared to $1.4 billion in 2022.

However, the company reported an adjusted free cash flow per share of $1.97 in 2023, up from $1.95 per share in 2022. In the last four quarters, it paid shareholders an annual dividend of $1.20 per share, indicating a payout ratio of less than 65%, which is sustainable.

Northland’s payout ratio also suggests the company has the flexibility to reduce balance sheet debt and target accretive acquisitions, which should drive future cash flows higher.

Despite a challenging macro environment, Northland Power exceeded guidance for free cash flow in 2023, showcasing its business’s resiliency.

What’s next for NPI stock?

Northland Power forecasts its payout ratio to be closer to or above 100% as it continues to spend on growth initiatives. However, Northland Power emphasized it will continue to pay dividends at an annual rate of $1.20 per share.

A payout ratio of more than 100% might make investors nervous. Alternatively, Northland Power is investing heavily in organic growth. Once these projects under construction are completed, they should deliver between $570 million and $615 million of adjusted EBITDA and $185 million and $210 million of free cash flow by 2027.

Northland Power is forecast to end 2024 with an adjusted earnings per share of $1.29, compared to a loss per share of $0.72. Moreover, its earnings are forecast to improve to $1.62 per share in 2025.

Priced at 17.4 times forward earnings, NPI stock is not too expensive and trades at a discount of 40% to consensus price target estimates.

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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