Toronto-based National Bank analyst Rupert Merer picks two utility stocks—both independent power producers—as his two “dividend all-stars” and “best buy” stocks.
The yield is the thing in today’s domestic stock market, according to a consortium of National Bank Financial research analysts. In February, the consortium released an omnibus report on National Bank Financial’s “dividend all-stars”. Out of more than 320 TSX-listed equities that the bank covers, more than half offer investors income through dividends or distributions.
Here are two clean energy producers to buy for growth and income. One is a pure play for renewable (wind power) energy production; the other uses wind, solar and natural gas.
The analysts whittled those stocks down to 24 “dividend all-stars” for 2019. To make the list, companies of all industries, sizes and liquidity levels had to meet three criteria: a dividend or distribution yield of four per cent or higher; an extremely low risk of current payouts proving unsustainable; and a positive analyst bias regarding prospects for share or unit price.
Adherents have been rewarded
Those requirements have served the list (and investors who adhere to it) well. The 2018 dividend all-stars portfolio returned income of 5.5 per cent and realized an average price return of 1.7 per cent in the year, adding up to a total return of 7.2 per cent from inception on Feb. 6, 2018. Over the same period, the S&P/TSX Composite Index returned 3.1 per cent in income and share prices rose an average of 1.1 per cent, for a total return of just 4.2 per cent.
National Bank’s omnibus report on its 2018 “dividend all-star” results and 2019 portfolio asserts: “The 2019 portfolio’s average 5.8 per cent yield is relatively high and compelling in our opinion, but more importantly it is supported by stable and growing cash flows, healthy balance sheets and encouraging operating outlooks providing confidence that the respective management teams will be maintaining or increasing payouts to investors over time.
“So far, this has been overwhelmingly the case, with seven all-stars increasing dividends in 2018 building upon the 14 that increased in 2017, 15 in 2016, 10 in 2015, eight in 2014, 12 in 2013 and 15 in 2012.” There have been a total of 101 dividend or distribution increases since National Bank’s creation of a dividend all-star portfolio in 2012 compared to only five cuts. “Given the low forward payout ratios forecast by our analysts, we believe the 2019 portfolio is well-positioned to continue returning capital to investors,” the omnibus report states.
2 ‘best buys’ are independent power producers
Financial analyst Rupert Merer in Toronto, who is also a qualified engineer, covers independent power producers and energy traders for National Bank. He highlights Northland Power Inc. (TSX—NPI) and Pattern Energy Group Inc. (TSX—PEGI; NASDAQ—PEGI) as his 2019 “dividend all-star” and “best buy” picks.
Based on recent share prices, National Bank calculates that Northland’s annual dividend of $1.20 per share will yield 4.9 per cent this year. Even more impressive, the bank estimates that Pattern Energy’s annualized dividend of US$1.69 will yield a whopping eight per cent.
Northland Power uses natural gas, wind and solar
Northland Power holds stakes in 2,040 net megawatts of power-generating capacity at natural gas-fired and renewable electricity plants. Mr. Merer says the company boasts an active pipeline of growth prospects, such as a 269-megawatt offshore wind farm under construction in Germany and a 626-net megawatt interest in another offshore wind project “in advanced stages of development” in Taiwan.
According to the analyst, Northland is on track to finish construction at the DeBu project in Germany by the end of 2019. “With that, we are projecting an increase in cash available for distribution through to 2020, when the plant is in operation, implying lowering payout ratios.
“We estimate about $225 million of discretionary free cash starting in 2020, which it could use towards growth investments, debt repayment, increased dividends, or a normal course issuer bid (or share buyback),” he says.
Aside from the Taiwan and Germany projects, the company is pressing on with opportunities in Mexico and South Korea, he adds.
Pattern is a renewable energy “pure play”
Meanwhile, Pattern Energy is one of the largest North American independent power producers that is purely focused on renewable electricity. The company owns 2,860 megawatts of wind and solar power-related assets in the United States, Canada and Japan.
Pattern has set a target of owning or managing 5,000 megawatts in capacity by 2020. Mr. Merer points out that the company has taken on more development than the market perceives.
“Pattern owns 29 per cent of its 10-gigawatt development pipeline (through its parent-owned Pattern Development Cos. master-limited partnerships) and has invested about $180 million of the roughly $600-million investment, including contributions from partners,” he explains.
The analyst also notes that roughly 92 per cent of its electricity generation is governed by fixed-price power purchase agreements and is financed through debt secured with non-cash collateral, keeping cash flow steady.
This is an edited version of an article that was originally published for subscribers in the March 22, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •4/18/19 •