Monday, March 24, 2014

TransAlta Corp. 2

On my other blog I am today writing about being rich without being wealthy continue...

I own this stock of TransAlta Corp. (TSX-TA, NYSE-TAC). I first bought this stock in 1987. It was a utility stock and utility stocks were considered to be good investments at the time I bought this stock. The stock is selling at a price slightly less than what I paid in 1987. I have really only made dividend income on this stock. I have made a return of 6.75% per year.

When I look at insider trading, I find no insider selling and $0.5M of insider buying. A lot of this buying seemed to have occurred after TransAlta cut their dividends and the stock dropped down in price. This is heartening. Half of this insider buying was by the CEO, but buying is also by CFO, officers and directors.

Outstanding shares were not increased for stock options in 2013 and the increases in shares for stock options in 2012 were rather modest at 100,000 with a book value of $1M. Not only is there outstanding stock options, but there are other option like vehicles called Performance Share Ownership Plan, Performance Share Units, Restricted Share Units and Deferred Share Units.

There is only modest insider ownership with the CEO having shares worth around $1.2M, the CFO having shares worth around $0.7M and the Chairman of the Board having shares worth around $250,000.

The 5 year low, median and high median Price/Earnings per Share Ratios are 14.85, 16.29 and 17.74. The P/E Ratios having become lower over the past 5 years. The 10 year low, median and high median P/E Ratios were 17.53, 20.53 and 23.06. The current P/E Ratio is 24.52 based on a stock price of $12.75 and 2014 earnings estimates of $0.52. This stock test suggests that the stock price is relatively high.

I get a current Graham Price of $9.63. The 10 year low, median and high median Price/Graham Price Ratios are 1.15, 1.38 and 1.64. The current P/GP Ratios is 1.32. This stock price test suggests that the stock price is relatively reasonable and at a median price.

I get a 10 year Price/Book Value per Share Ratio of 1.82. The current P/B Ratio is 1.61 a value some 12% lower. My P/B Ratio is based on a stock price of $12.75 and a Book Value per Share of $7.92. This stock price test suggests that the stock price is relatively reasonable.

I get a 5 year median dividend yield of 5.43% and the current dividend yield is 5.65% a value some 4% higher. This stock price test suggests that the stock price is relatively reasonable. On an historical basis the average dividend yield is around 6% and the median around 5.7%. This stock price test also suggests that the stock price is reasonable.

When I look at analysts' recommendations, I find Hold and Underperform recommendations. The consensus recommendation would be a Hold recommendation. The 12 month consensus stock price is $12.90. This implies a total return of 6.82% with 5.65% from dividends and 1.18% from capital gains.

There is an interview with the CEO of TransAlta. She said that they had to cut dividends to allow the company to grow. This is a 6 minute interview, after some BNN advertising. An article in the G&M covers similar ground. There is a rather disturbing item in the Calgary Herald in which the Alberta Utilities Commission accused TransAlta of manipulating electricity market. The company has deigned this accusation.

I would not currently buy any more of this stock. I do not see a good risk reward level. By my testing the stock price is just reasonable but I think there is considerable risk in this stock. See my spreadsheet at ta.htm.

This is the second of two parts. The first part was posted on Friday, March 21, 2013 and is available here. The first part talks about the stock and the second part talks about the stock price.

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.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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