Northland Power Inc 2

I do not own this stock of Northland Power Inc. (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 last year 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.

When I look at insider trading, I find minimal trading with $0.10 insider buying and $0.14 insider selling. Insiders do not have options, but some have what is called "Replacement Rights" and these rights are convertible into shares. They were issued in connection with the merger with NPI. I would again like to point out one thing that I mentioned yesterday and that is that most of the convertible shares are owned by the previous Chairman of the Board. Because of the convertible and common shares he owns, I calculate that he owns around 70% of the outstanding shares.

There are 2 institutions that have shares in this company and own 0.55% of the company. Over the past 3 months they have decreased their shares by 40%. One institution closed their position and one institution decreased their position in this company. (There are inconsistencies in this report, because when I looked on September 29, it was reported that 5 institutions held 1.81% of the shares.)

When I look at 5 year low, median and high median Price/Earnings Ratios, I get 9.40, 11.28 and 13.16. Note that there are problems with looking as over the past 5 years as the company had two negative earning years. The 10 year low, median and high median P/E Ratios are 17.58, 19.66 and 20.93. Because so little is expected in earnings this year, I get a current P/E of 136.71 and a forward P/E of 54.69. This certainly shows that the stock price is relatively and absolutely high.

I get a current Graham Price of $3.97. The 10 year low, median and high median Price/Graham Price Ratio are 1.03, 1.17 and 1.34. I get a current P/GP Ratio of 4.83 and this high ratio a very high relative stock price. The problem with this test is that the Graham Price has been falling lately because of bad earning years and dropping book value. As recently as 2009, Graham Price was $9.94. As the Graham Price has fallen, the P/GP Ratio has been raising.

I get a 10 year median Price/Book Value per share Ratio of 1.75. The current P/B Ratio is 3.83. This current ratio is some 118% higher than the 10 year ratio.

The 5 year median dividend yield is 8.48%. The current yield is 5.64%. Although the 5 year median dividend yield is high and the current one is a good one, it is some 33% lower. You normally would want a higher dividend yield currently than the 5 year median.

Looking quickly at other measures, I get a 10 year Price/Sales Ratio of 4.87 and a current one of 6.62. A better price is with a lower current ratio than the 10 year median one. The 10 year median Price/Cash Flow ratio is 11.41 and the current one, based on last 12 month's cash flow is 14.72. Here again, a better price is a lower ratio.

All tests point to a very high relative current stock price. This stock is having trouble making a profit and the price does not seem to reflect that. I know we price stock based on what we think that the future holds, but it would appear that the current price is relatively high.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold. The vast majority of the recommendations are a Hold. The consensus recommendation would be a Hold. The 12 month stock price is $19.00. This implies a capital loss of 0.73%, dividend yield at 5.64% for a total return of 4.91%.

A couple of analysts have mentioned that the Dividend Payout Ratio is too high. One analyst thought the management team was very good. Another thought that the DPR will be around 80% in a couple of years. Note that this company has outperformed the TSX Index and the TSX Utilities Index over the past 1 to 3 years.

This company was a recent pick for Scotia McLeod's Greg Newman. See G&M's article.

The one thing that would prevent me from buying this company is that their earnings cannot cover their dividends. You would want a utility to have a Dividend Payout Ratio for earnings no higher than 70 to 75%. This company does not even come close to earnings covering dividends and will not for a while, as far as I can see.

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.