Utility companies are notoriously great investments. These companies offer regulated earnings that provide investors with security that not only lasts a year or two, but even decades from long-term contracts. So it’s no wonder that companies such as Capital Power (TSX: CPX) have seen shares rise by over 30% in the last year, all while offering a 4.2% dividend yield.
Yet if you think that growth has come and gone, think again. CPX is still a great option for long-term investors. So let’s get right into why.
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Into earnings
First, let’s consider earnings to explore why CPX looks like a utility stock worth considering. The big headline? CPX made a big acquisition, closing the Hummel, providing 1,124 megawatts of power, and Rolling Hills with 1,023 MW of power. Furthermore, it purchased PJM for about $3 billion, adding another 2.2 gigawatts of power generation. What’s more, these are young assets, offering a long life filled with adjusted free cash flow (AFFO).
It’s clear why the company is able to support such growth. The utility stock reported its second-quarter results recently, demonstrating AFFO of $235 million. Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was flat at $322 million, and it did report a net loss of $131 million from the acquisition. However, cash flow from operations was $143 million, up slightly from the year-ago period. Furthermore, confidence remains high, with the dividend stock reporting an increase in the dividend to $2.61 on an annual basis. That’s the 12th increase in recent years!
Valuation
So with all this growth, it can be easy to wonder whether this utility stock is still valuable. So let’s look at the fundamentals in this case. First off, these acquisitions were mainly funded by U.S. senior notes issued for $1.7 billion and a $667 million equity raise. Furthermore, the price momentum led to around a 30% increase over the last year while maintaining a low beta at just 0.47 at writing. So even with all that share price movement, it’s still a less volatile stock.
Then there’s today’s share price. CPX currently trades at 19.5 times earnings, with enterprise value-over-EBITDA at 12.9. So it’s not only reasonable, it’s downright cheap! Especially considering the growth expectations. Meanwhile, its net debt-over-EBITDA should also rise post-acquisition. For now, it offers total debt at $7.1 billion with cash of $309 million.
Considerations
What investors are getting into now, then, is a dividend stock with a yield that is only rising higher and currently at 4.2% at writing. Not only that, investors are also buying future growth thanks to a new wave of acquisitions from the dividend stock. Of course, acquisitions financed partly with debt and long-dated notes will need to be watched. Furthermore, there are always integration and execution risks, so investors will need to watch these acquisitions carefully.
That being said, overall, this is a stellar dividend stock to collect cash flow while shares continue to rise higher. PJM is the largest, most liquid U.S. power market, adding revenue upside, capacity market participation, and optimization opportunities. As CPX continues to shift into more flexible power generation and storage, that dividend remains strong, offering growth in every respect for investors.
Bottom line
CPX is therefore an excellent buy-and-hold stock that’s only getting stronger. If you want mid-single-digit to mid-double-digit growth and a stable dividend yield, and can accept higher leverage, then it’s a perfect buy. All considered, it’s a hybrid utility stock not only offering utility income, but growth as well through merger and acquisition activity.
