3 trusts to buy for growth and income

Here are three power generation trusts—Algonquin, Boralex and Northland—that are buys for growth and income.

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With the exception of Algonquin’s gas assets, these three income trusts deliver clean energy from wind, water, thermal and solar sources.

Algonquin Power (TSX—AQN)

Algonquin had a busy year in 2019. The company added nearly 30,000 new customers through the completion of two utility acquisitions—New Brunswick Gas and St. Lawrence Gas. It also made progress on its Mid-West wind development project as part of its ‘Greening the Fleet’ initiative. And it announced agreements to acquire two new regulated utilities, Bermuda Electric Light Company and New York American Water.

Algonquin Power & Utilities Corp. is a diversified international generation, transmission and distribution utility with about US$11 billion of total assets.

For the year ended Dec. 31, 2019, Algonquin made an adjusted $321.3 million (all figures in US dollars unless otherwise noted), or $0.63 a share, compared with $312.2 million, or $0.66 a share, in 2018.

The increase was due to increased earnings from operating facilities, and increased interest, dividend, equity and other income.

The lower earnings per share reflected an increase in shares outstanding.

Algonquin has announced a $9.2-billion growth plan to drive increases in earnings and cash flow, which should, in turn, support a growing dividend and share-price gains. The company has also updated its five-year forecasted adjusted earnings per share compound annual growth rate, which remains in the range of nine to 11 per cent. The growth program includes $6.7 billion of investments in the company’s regulated services business.

Algonquin should earn C$1.00 a share in 2020. The shares trade at a reasonable 15.2 times that figure. Its annual dividend of C$0.82 a share yields 5.4 per cent.

Buy for growth and income.

Boralex (TSX—BLX)

Boralex recorded an increase in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and net earnings excluding unusual items in 2019. EBITDA rose 39 per cent to $492 million. The increase reflected the contribution from sites acquired and commissioned, as well as higher revenues from energy sales from existing sites.

Boralex Inc. develops, builds and operates renewable energy power facilities in Canada, France, the UK and the US. A leader in the Canadian market and France’s largest independent producer of onshore wind power, the company focuses on four power generation types—wind, hydroelectric, thermal and solar.

The company’s strong 2019 financial results and disciplined approach to investments generated a similarly strong increase in discretionary cash flow (DCF), which more than doubled to $120 million. Management’s goal is to pay out 40 to 60 per cent of its DCF in dividends. Currently, the payout ratio sits at 50 per cent.

Boralex’s financial results were driven by a strong operational performance. The company produced 4,371 gigawatt-hours in 2019, an increase of 23 per cent from 2018. This growth was largely attributed to the contribution from sites acquired or commissioned. Production from existing assets rose seven per cent, due to better results in both the wind and hydroelectric power segments.

Management says the strong increase in DCF augurs well for the company achieving its 2023 financial objectives. The company hopes to generate DCF of $140 million to $150 million by then, representing annual compound growth of 20 per cent for the 2018 to 2023 period. To achieve this, it plans to reach gross installed capacity of 2,800 megawatts (MW) in 2023, up from its current capacity of 2,040 MW.

The stock trades at a reasonable 6.7 times Boralex’s likely 2020 cash flow of $3.16 a share. Its annual dividend of $0.66 a share yields 3.1 per cent. Buy.

Northland Power (TSX—NPI)

Northland’s activities in 2019 were characterized by expansion into Latin America through its first solar power project in Mexico and the acquisition of its first regulated utility in Colombia. The company also established a joint venture partnership to pursue offshore wind projects in Japan, and acquired an early stage development company in South Korea, both key target markets for continued growth.

Northland Power Inc. is a global developer, owner and operator of sustainable infrastructure assets. The company owns or has an economic interest in 2,429 megawatts (net 2,014 MW) of operating generating capacity and 399MW under construction.

For the year ended Dec. 31, 2019, Northland made $451.8 million, or $1.68 a diluted share, compared with $405.5 million, or $1.46 a share, in 2018.

Sales rose 6.6 per cent to $1.7 billion, thanks to pre-completion revenues at Deutsche Bucht, the company’s German offshore wind project, and higher overall production at all operating facilities.

Gross profit increased 7.0 per cent to $1.5 billion, driven by the sales increase and lower gas transportation costs at thermal facilities.

Operating income was $813.7 million, up 11.0 per cent. This partly reflected a 5.1-per-cent drop in operating costs due to the timing of repairs and maintenance at offshore wind facilities, lower insurance premiums at Gemini, the company’s Dutch offshore wind farm, and lower costs from operating efficiencies at Nordsee One, another German offshore project.

Northland seeks to invest in technologies and jurisdictions where it can benefit from an early-mover advantage and establish a meaningful presence. This will entail higher development expenses, but should lead to growth.

Northland trades at 13.7 times the $1.67 a share it will probably earn in 2020. Its annual dividend of $1.20 a share yields 5.2 per cent. Northland Power is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the April 3, 2020, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.
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