Friday, July 22, 2011

Northland Power Inc

I do not own this stock (TSX-NPI). This company is into generating electric power. I have a lot invested in pipelines and I would like to have more invested in electric power as my utilities investment. I read a report on this stock that said it was a good defensive stock to buy. That is, it is a good stock to hold in a stock market correction. I can certainly see the logic of using utility stocks as defensive stocks. I am not sure that this is a utility stock I would use for that purpose.

At least this stock is earning money (i.e. Earnings per Shares (EPS) is mostly positive. However, the median Dividend Payout Ratio (based on earnings) on this stock is 180% over the past 5 years. The DPR, based on cash flow is better at a 5 year median of 92.3%. The company has also announced that they will be paying out more than 100% of their Free Cash Flow (FCF) until 2013. They have no plans on reducing their distributions.

The dividend yield on this stock is certainly very good. The current yield is at 6.7%. However, the 5 year median yield is higher at 8.5%. Also, they lowered the dividend payments in 2009 from $1.12 per year per share to $1.08 per year per share. Note that the dividend payments in 2007 were also $1.08 per year per share. This company was also an Income Trust and just made the transition to a corporation as of 1 January 2011.

What do I not like about this company? First of all, earnings (EPS) have fluctuated over the years. Also, the EPS are currently lower than they were 10 years ago. Distributable Cash has also been declining over the last few years. Of course, the problem with Distributable Cash is that there has been also sorts of changes to the methods used to calculate this figure over the years.

Cash flow, no matter how you calculate it, has either remained flat or declined over the past 5 and 10 years. Part of the problem is that Cash Flow is calculated per share and shares have been increasing. The 10 year median increase for shares is 5% per year. Book Value has also been decreasing over the past 5 and 10 years. This can be normal for Income Trust stock. Book Value is also calculated per share and increase in shares has therefore affected this stock’s Book Value

If you look just at revenue, it has been increasing over the by past 5 and 10 years at around 18% per year. However, the crucial figure is the revenue per share and this has only increased by 2.8% and 4% per year over the past 5 and 10 years, respectively.

Total Return on this stock has been good over the past 5 and 10 years and this has mainly to do with distributions. The 5 and 10 year Total Return is 8 and 15% per year. The portion of this return due to distributions is around 7% and 9% per year, respectively. So, you would have made money on this stock, but a lot of the return is in distributions.

Also, in the early years, a lot of the distributions were considered Return of Capital (that is the distributions affected your Adjusted Cost Basis (ACB)) and were not taxable. Later more and more became taxable, until almost all the distributions of recent years were taxable. Going forward, the distributions should be taxed as dividends.

As far as debt ratios go, the ones on this stock are very good. The Liquidity and Asset/Liability Ratios have been very good. The current ones of 1.75 and 1.68 are particularly good. Also, these Ratios are usually lower on most utility stocks. The same can be said about the Leverage Ratio and Debt/Equity Ratio of 2.99 and 1.78. These are quite good for a utility stock.

However, we should move on to Return on Equity (ROE). This stock seems to have done poorly on this measure in the past. The year 2010 was not good and it has a ROE under 1%. The 5 year median is just 5% per year. These are very low, even for a utility stock. According to the statements of March 31, 2011, the ROE for the last 12 months would be 17%. A very good figure and the absolute best one ever for this stock.

I would never expect a utility company to have great growth. What I expect is that it has slow steady growth. The point with defensive stock is that they should make money in good times and in bad times. They should be selling things that people need, no matter what. I am not sure I like this particular stock. However, it may improve with age.

Northland Power Inc. indirectly owns interests in power projects. Northland's assets comprise facilities that produce electricity from "clean" natural gas and "green" renewable sources such as wind and biomass. Electricity generation is sold under long-term PPAs with creditworthy customers, and any fuel for natural-gas-fired projects, where required, is purchased under long-term contracts to assure stability of operating margins. This company operates in Canada, US and Germany. Its web site is here Northland Power. See my spreadsheet at npi.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.

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