We all want in on the future of the TSX and whatever is going to be the next big thing. But that’s practically impossible to identify … well, practically.
There is one area that’s all but assured to take over, and that’s renewable energy. So, let’s get into why this sector is bound for greatness, especially on the TSX. Furthermore, one 6% dividend stock is set to take advantage.
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Why renewables?
The renewable energy sector is poised to dominate the TSX due to a global shift towards sustainable energy solutions. Governments worldwide are implementing policies to reduce carbon emissions and combat climate change. This led to increased investments in renewable energy sources such as wind, solar, and hydroelectric power. Canada, with its vast natural resources and commitment to reducing its carbon footprint, is well-positioned to benefit from this trend.
Technological advancements and decreasing costs are also driving the renewable energy sector’s prominence. Innovations in energy storage, grid management, and efficiency improvements make renewable energy more competitive with traditional fossil fuels. The cost of solar panels and wind turbines has decreased dramatically over the past decade. Now, renewable energy projects are more affordable.
And now, everyone wants in. Large pension funds, mutual funds, and individual investors are allocating more capital to companies that demonstrate strong environmental sustainability performance. This trend is creating a favourable investment environment for renewable energy firms, driving up their stock prices and market capitalizations.
A stock to benefit
Capital Power (TSX: CPX) stands to benefit significantly. This was showcased in its recent second-quarter 2024 earnings. The company generated adjusted funds from operations (AFFO) of $178 million and a net income of $76 million, showing its strong cash flow and profitability. The successful completion of the first Canadian 30-year hybrid financing for $450 million also highlights its financial stability and ability to access capital for growth.
But there’s more on the way as well. The ongoing integration of newly acquired assets in the U.S. also illustrates the success of its geographic diversification strategy. The entry into 25-year power-purchase agreements for solar projects in the U.S. now solidifies its long-term growth prospects in renewable energy.
Furthermore, Capital Power is advancing its Battery Energy Storage System (BESS) projects, which are progressing on time and under budget. Construction is expected to begin in the third quarter. Altogether, this company is lined up for a stellar future.
Value on deck
Capital Power now offers a huge opportunity. With a trailing price-to-earnings (P/E) ratio of 8.59 and a forward P/E ratio of 13.79, the stock is relatively undervalued compared to its earnings potential. The enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 6.74 further underscores its appealing valuation.
Furthermore, the 6% increase in annual common share dividends to $2.61 per year signals confidence in future earnings and a commitment to returning value to shareholders. With a forward annual dividend rate of $2.61 and a forward annual dividend yield of 6.01%, it offers a significant return to shareholders. This yield is well above the average, providing a reliable income stream in addition to potential capital gains. Plus, the payout ratio of 48.71% indicates that the company is distributing less than half of its earnings as dividends, which is a healthy balance that allows for both rewarding shareholders and reinvesting in growth opportunities.
Bottom line
If ever there was a time to invest in Capital Power stock, it’s now. The dividend stock has stellar finances, with a strong balance sheet supported by both top- and bottom-line growth. The company should continue to see improvements as the world continues to shift to renewables. So, with a 6% dividend yield, I would certainly pick it up on the TSX today.
