If you’re attracted to Northland Power (TSX: NPI) stock for its 6% dividend yield, read on. In this article, I’ll go over some reasons to consider buying the stock, from its growth prospects to the expected upcoming ramp-up in cash flows. Essentially, the dividend yield is only one of many reasons that Northland Power stock is a buy.
Let’s look into it.
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Northland Power: The business of renewables
Northland Power has produced electricity from clean-burning natural gas and renewable resources for 35 years. The company has a diversified list of energy-producing assets, such as clean-burning natural gas, wind, and solar assets. Its portfolio of assets is also geographically diversified in places such as Asia, Europe, and North America.
Northland Power has grown from a company that generated $728 million in revenue in 2015 to a company that generated revenue of $2.2 billion in 2023. This is an increase of more than 200%, and it represents a compound annual growth rate (CAGR) of 14%. Similarly, Northland has grown its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from $402 million in 2015 to $1.24 billion in 2023. This is 208% higher and represents a CAGR of 15%.
Today, Northland has a number of major projects that are nearing completion, which will boost its EBITDA and cash flow materially upon completion. Completion dates for the three major projects will happen between 2025 and 2027. This will support meeting management’s goal for an adjusted EBITDA CAGR of 7 to 10% from 2023 to 2027.
A high-yield dividend
As I mentioned earlier, Northland Power stock has a dividend yield of 6% at this time. It’s a yield that puts the stock into high-yield territory and one that makes it interesting to many income-seeking investors.
A high-yield stock is a high-yield stock for a reason. Usually, the reason is the company’s risk profile. In Northland Power’s case, the risks lie in the company’s high debt levels, as well as the capital-intensive nature of its business. Building massive energy projects is notoriously expensive, and this requires debt and money from the equity markets, both of which increase the risk of owning the stock.
So, let’s address this risk. First is the debt risk. Today, Northland Power’s balance sheet is in good shape, with $800 million in liquidity. The company’s debt-to-capitalization ratio is high, at north of 60%, but its construction program is fully funded.
Second, Northland’s payout ratio was quite high last year, leaving investors to worry that maybe the dividend could be cut. But I would look to Northland’s operating cash flow in order to help me decide the real risk here. In the first six months of 2024, Northland’s operating cash flow before changes in working capital was $772 million. This compares to capital expenditures of $456 million. Adjusted free cash flow was $294 million. This compares to dividends paid of $101 million. As you can see, the company’s dividend payments are pretty easily covered.
The bottom line
So far this year, Northland Power has been tracking on the high end of its guidance. Global energy demand is strong, and it’s being driven by the electrification of industries as well as artificial intelligence and data centres. These tailwinds leave Northland well-positioned for the years ahead. With a strong operational performance, Northland will be able to capture its share of this energy boom.
