Transalta tumbled almost 21% over the last 6 months and value investors are wondering if this is a good chance to pick up a good dividend paying stock at a bargain price. Transalta is known to be a company that paid stable dividends to investors over the years and its 6.72% dividend yield seems to be attractive right now. Let's investigate and find out if this is a good opportunity to pick up Transalta stock.
While the 29 cents quarterly dividends looks attractive, Transalta has not raised its dividends since 2008 and some analysts said the Transalta's dividend is too high relative to its earnings and the dividends is at risk. The payout ratio relatively to earnings of Transalta (Dividends/Earnings) was 128.9%, 116% and 88.5% respectively over the last 3 years while the payout ratio relative to cashflow was 43.6%, 31.5%, 37.4%. Looking at these numbers it seems the dividends looks safe but the company might struggle to raise it in the future because Transalta has been paying all its earnings to shareholders instead of investing it in promising growth projects
In December, 2010, TransAlta took Sundance 1 and 2 offline and the company then moved to terminate a “power purchase arrangement” (PPA) with TransCanada Corp., which had the right to buy the power from Sundance 1 and 2 at an attractive price. Transalta is currently involved in a contract dispute with Transcanada Corp and an arbitration hearing is schduled for April 2012 , with a decision expected in July. Should the decision go against Transalta, the company might have to pay a stiff penalties.
In a recent report, National Bank Financial analyst Patrick Kenny estimated a maximum financial liability of $363-million, consisting of $263-million in accrued penalties and $100-million in repair costs, assuming TransAlta takes six months to fix the units.
That could slice an additional $1.50 a share from NBF’s valuation of $19, said Mr. Kenny, who has an “underperform” rating on the stock.
Transalta will be in the penalty box until the contract dispute with Transcanada clears up. The stock price might pops if the hearing goes in Transalta's favor or drop if it goes in TransCanada's favor. Looking at the track record of Transalta, the growth in dividends has been at 3% and 1.5% over the past 5 and 10 years and dividend increase has been few and far between. As far as growth goes, there has not been much growth in the company's cash flow, earnings or book value. Looking into the future, investors have to consider if a 7% yield is worth the downside risk if the contract dispute goes against Transalta's favor.
For more info on Transalta, blogger Susan Brunner have a good overview of the company in her blog below:
Investment talk with SPBrunner
http://spbrunner.blogspot.ca/2012/04/transalta-corp.html
Globe and mail article: TransAlta: A stock that's run out of juice
http://www.theglobeandmail.com/globe-investor/investment-ideas/yield-hog/transalta-a-stock-thats-run-out-of-juice/article2383355/
