The double whammy of interest rate hikes and inflation has forced several debt-heavy companies – which are part of capital-intensive sectors such as real estate, utilities, and energy – to lower their dividend yields in the last two years.
The rising cost of debt has made it difficult for companies to service their interest payments while allocating funds toward organic growth and dividends. In November 2023, I warned investors about the risks of investing in high dividend stocks such as Innergex Renewable (TSX: INE) due to its unsustainable payout ratio of more than 100%. Soon after, Innergex Renewable cut its quarterly dividend payout by 50%.
Today, the renewable energy company pays shareholders a quarterly dividend of $0.09 per share, translating to a yield of 4.2%. Is it a good time to scoop up shares of the TSX dividend stock?
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An overview of Innergex Renewable
Valued at a market cap of $1.8 billion, Innergex Renewable is among the largest clean energy companies in Canada. Over the years, it has built a diversified portfolio of cash-generating assets across verticals such as solar, wind, and hydro energy.
Its installed capacity is 4.3 gigawatts, enough to power more than three million homes. In the last nine years, Innergex has more than tripled its power-generating capacity, resulting in higher earnings and cash flow. With 87 operating facilities and multiple projects under development, Innergex aims to develop and acquire facilities that offer an attractive risk-adjusted return on capital.
The dividend cut offers Innergex financial flexibility
Investors were not impressed with the dividend cut Innergex announced in early 2024, resulting in a pullback in share prices. The TSX dividend stock currently trades over 73% below all-time highs and has underperformed the broader markets by a significant margin.
However, Innergex emphasized that its updated capital allocation strategy powered by a recalibrated dividend and a lower payout ratio should increase financial flexibility and allow for organic investments in greenfield projects. Innergex Renewable’s new payout ratio will now range between 30% and 50% of free cash flow, providing the company with an additional $75 million to support growth initiatives.
Innergex has a development portfolio of over 10 gigawatts, more than doubling its current capacity.
What is the target price for Innergex Renewable stock?
While Innergex Renewable has slashed its dividend, investors should note that the company is part of an expanding addressable market and has resilient cash flows. Its earnings are tied to long-term power purchase agreements, enabling the company to report steady cash flows across market cycles.
While its long-term debt of more than $6 billion is quite sizeable, Innergex believes its leverage profile is well supported by quality, long-lived hydro assets.
In 2024, it expects adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) to range between $725 million and $775 million, with free cash flow between $0.70 per share and $0.85 per share. At the midpoint, Innergex stock trades at 11 times forward cash flow, which is quite cheap.
Analysts remain bullish and expect the TSX dividend stock to gain almost 30% in the next 12 months.
