Friday, April 8, 2011

TransAlta Corp

I bought this stock (TSX-TA) in 1987, some 24 years ago. I brought some more in 2009 because the price was good. I have made a total return of 7.8% per year on this stock. About 4.5% of my total return would be in dividends. This is a solid, conservative dividend paying utility stock. What I expect it to earn over the long term is 8% per year with about 4% from dividends. I would want dividend growth to be at the rate of inflation.

However, this stock is going though a trying time and over the past 5 and 10 years, the total return would be probably around 0% and 4.5%. Basically, what I have earned is dividend income. On my original investment in 1987, I am making a yield of around 8%. The dividend growth over the past 5 and 10 years has been at 3% and 1.5% per year, respectively. The 10 year growth is lower than inflation.

The current yield at 5.7% is good. The dividend potential on an investment today would be 7.6% within 10 years time based on annual growth of 3%. Long term background inflation is 3%. The 10 year growth in inflation in Canada has been at 2%. The 5 year growth in inflation is a bit lower at 1.8%. Dividend payout Ratios are high, especially compared to earnings where they are more than 100%. Payout Ratio for Earnings was 116% and Payout Ratio for Cash Flow was 31% for 2010. There will probably not be an increase in dividend until the Payout Ratio for earnings is better.

The best growth rates have been for cash flow, which over the past 5 and 10 years has grown at the rate of 3.5% and 12% per year, respectively. Revenues, earnings, and book value have not grown at all or only minimally. As I have said, the company is going through a rough time.

This sort of company generally has high debts and some of the debt ratios are a little worse than they should be. The Liquidity ratio at 0.71 is low. The Asset/Liability is where it should be at 1.56. Both the Leverage Ratio and the Debt/Equity Ratios are a bit high at 3.50 and 2.25 at the end of 2010, respectively.

The Return on Equity, using the net income is a bit low for both 2009 and 2010. They were 6.2% and 7.7% respectively. The 5 year median ROE is 7.7%. I would like it a bit higher at 8%.

This stock is one of my core stocks and I will retain the shares I have for the dividend yield and some future capital gain. This company is moving away from coal fired electrical generation facilities and it has made deals with applicable governments for an orderly transition to cleaner forms of electrical generation.

TransAlta is a power generation and wholesale marketing company. TransAlta maintains a low-to-moderate risk profile by operating a highly contracted portfolio of assets in Canada, the United States and Australia. TransAlta's focus is to efficiently operate our biomass, geothermal, wind, hydro, natural gas and coal facilities in order to provide our customers with a reliable, low-cost source of power. Its web site is here Transalta. See my spreadsheet at ta.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. First comment removed, too many typos. Sorry Susan.

    I've owned this one for a few years as well. Some folks say it should be sold, but it's still paying me :)

    I agree, this kind of company generally has high debt but with that, do you think the dividend is in jeopardy?

    I think they will eventually get their act together and bring div. payout ratio down. More importantly, debt ratios down.