Is it a good company at a reasonable price? Most of the testing is showing the stock as expensive as it hasn’t done well in some aspects over the past 5 and 10 years. For example, it has a declining book value. Analysts’ estimates are down for 2022 with the exception that earnings are expected to be positive from a loss in 2021. I do not regret selling. I do not think the company has proven yet that it can be a profitable company for investors. It also has a lot of debt and this is a risk.
I do not own this stock of TransAlta Corp (TSX-TA, NSYE-TAC). I bought this stock in 1987. It was a utility stock and utility stocks were considered to be good investments. I sold some in 2000 as the stock price was below what I had paid for it. I bought some more in February 2009 because it was relatively cheap and it seemed to be recovering. I sold more in August 2012 as this company was doing poorly again. By September 2019, I had finally had enough and saw no hope in this stock doing better. I noticed that MPL Communications had given up hope in 2014.
When I was updating my spreadsheet, I noticed Revenue was expected to go down 3% to $2,034M, but instead went up 30% to $2,721M. However, interestingly, analysts expect a drop in Revenue for 2022 to $2,223M. The difference seems to be a category called Merchant Revenue. Merchant Revenue is revenues from non-contracted capacity (i.e., merchant) are comprised of energy payments, at market price, for each MWh produced and are recognized upon delivery.
I remember at a Money Show some time ago, I think it was 2016, a presenter said at that time that this company has been destroying shareholder’s value for the past 20 years. I thought it was a little harsh at that time, but now I think he might have been on to something.
If you had invested in this company in December 2011, $1,008.96 you would have bought 48 shares at $21.02 per share. In December 2021, after 10 years you would have received $241.20 in dividends. The stock would be worth $674.40. Your total return would have been $915.60.
If you had invested in this company in December 2016, $1,003.05 you would have bought 135 shares at $7.43 per share. In December 2021, after 5 years you would have received $111.38 in dividends. The stock would be worth $1,896.75. Your total return would have been $2,008.13.
| Cost | Tot. Cost | Shares | Years | Dividends | Stock Val | Tot Ret |
|---|---|---|---|---|---|---|
| $21.02 | $1,008.96 | 48 | 10 | $241.20 | $674.40 | $915.60 |
| $7.43 | $1,003.05 | 135 | 5 | $111.38 | $1,896.75 | $2,008.13 |
The dividend yields are low with dividend growth resuming in 2020. The current dividend yield is low (below 2%) at 1.63%. The 5 and 10 year median dividend yields are moderate (2% to 4% ranges) at 2.05% and 3.86%. The historical median dividend yield is good (5% to 6% ranges) at 5.43%. Most of the life of this company, dividend yields were in the moderate to good ranges, but the company spend basically from 2014 to 2017 cutting the dividends. Dividend increases were restarted in 2020. The last dividend increase was in 2022 and it was for 11%.
The Dividend Payout Ratios (DPR) are currently fine but dividends have dropped some 86% since 2013. The DPR for EPS for 2021 are not-calculable because of earnings losses. The 5 year coverage is not calculable due to earnings losses. The DPR for EPS for 2022 is expected to be 56%. The DPR for Cash Flow per Share for 2021 is 6% with 5 year coverage also at 4%. Because this is a utility, I also have Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) values. The DPR for 2021 for FFO is 44% with 5 year coverage at 6%. The DPR for 2021 for AFFO is 9% with 5 year coverage at 11%. The DPR for Free Cash Flow for 2021 is 9% with 5 year coverage at 12%.
Debt Ratios are not great and this is a risk. The Long Term Debt/Market Cap ratio is fine at 0.64 with a current one higher at 0.75. It would be nice it was at 0.50 or lower. The Liquidity Ratio for 2021 is 1.14, but if you add in cash flow after dividends it is 1.63. I like this ratio to be 1.50 or higher. The Debt Ratio is low at 1.39 and I like this to be 1.50 or higher. The Leverage Debt/Equity Ratios are 3.56 and 2.56. I prefer these to be below 3.00 and below 2.00.
The Total Return per year is shown below for years of 5 to 34 to the end of 2021. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2016 | 5 | -9.96% | 15.33% | 13.59% | 1.74% |
| 2011 | 10 | -17.12% | -1.16% | -3.95% | 2.79% |
| 2006 | 15 | -10.89% | -0.71% | -4.18% | 3.47% |
| 2001 | 20 | -8.28% | 2.42% | -2.13% | 4.55% |
| 1996 | 25 | -6.61% | 4.81% | -0.82% | 5.63% |
| 1991 | 30 | -5.54% | 7.03% | 0.13% | 6.89% |
| 1987 | 34 | -4.72% | 6.58% | -0.07% | 6.64% |
The 5 year low, median, and high median Price/Earnings per Share Ratios are negative and unusable. The corresponding 10 year ratios are also negative and unusable. The corresponding historical ratios are 14.90, 14.23 and 21.19. The current P/E Ratio 34.08 based on a stock price of $12.27 and EPS estimate for 2022 of $0.36. This stock price testing suggests that the stock price is relatively expensive.
This stock has also got Price/Funds from Operations values. The 5 year low, median, and high median P/FFO Ratios are 2.22, 2.92 and 3.74. The corresponding 10 year ratios 2.35, 3.24 and 4.27. The current P/FFO Ratio is 3.43 based on last 12 months FFO of $3.58 and a stock price of $12.27. The current ratio is between the median and high ratios of the 10 year median ratios. This stock price testing suggests that the stock price is relatively reasonable but above the median.
This stock has also got Price/Adjusted Funds from Operations values. The 5 year low, median, and high median P/AFFO Ratios are 4.25, 5.83 and 6.95. The corresponding 10 year ratios 4.48, 6.14 and 7.91. The current P/AFFO Ratio is 6.60 based on AFFO estimate for 2022 of $1.86 and a stock price of $12.27. The current ratio is between the median and high ratios of the 10 year median ratios. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get a Graham Price of $3.92. The 10 year low, median, and high median Price/Graham Price Ratios are 1.01, 1.34 and 1.62. The current P/GP Ratio is 3.13 based on a stock price of $12.27. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median Price/Book Value per Share Ratio of 1.30. The current P/B Ratio is 6.47 based on Book Value of $640M, Book Value per Share of $2.36 and a stock price of $12.27. The current ratio is 300% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive. Also, a P/B Ratio of 6.47 is very high considering a good one would be around 1.50. This is because the Book Value has declined a lot over the past 10 years (and 5 years).
There is also an estimate Book Value per Share for 2022. That Book Value per Share for 2022 is $2.50. This implies a total Book Value of $677.5M, and P/B Ratio of 4.91 with a stock price of $12.27. This ratio is 277% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median Price/Cash Flow per Share Ratio of 3.40. The current ratio is 3.71 based on Cash Flow per Share estimate for 2022 of $3.31, Cash Flow of $897M and a stock price of $12.27. The current ratio is 9% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable but above the median.
I get an historical median dividend yield of 5.43%. The current dividend yield is 1.63% based on dividends of $0.20 and a stock price of $12.27. The current dividend is 70% below the historical median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
I get a 10 year median dividend yield of 3.86%. The current dividend yield is 1.63% based on dividends of $0.20 and a stock price of $12.27. The current dividend is 58% below the 10 year median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
The 10 year median Price/Sales (Revenue) Ratio is 1.05. The current P/S Ratio is 1.50 based on Revenue estimate for 2022 of $2,223M, Revenue per Share of $8.20 and a stock price of $12.27. The current ratio is 42% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
Results of stock price testing is that the stock price is probably is relatively expensive. The P/S Ratio test is showing the stock price as relatively expensive. The Dividend Yield tests are also showing the stock price as expensive, but these are not good tests for declining dividends. However, declining dividends are not a good sign. The P/CF Ratio test is showing the stock price as reasonable. This is also true of the P/FFO Ratio and P/AFFO Ratio tests. But where we have an estimate for the AFFO, it is lower than last year’s AFFO.
The reason why so many of the tests are coming up with the stock price being expensive is because of declining values per share. EPS is down by 48% per year over the past 5 years. Also, analysts do not expect the company will do as well in 2022 as it did in 2021. For example, they expect the Revenue to decline by 18% to $2,223 in 2022. This is compared to the increase in Revenue by 30% in 2021 to $2,721.
Last year, the results of stock price testing were that the stock price is probably expensive. The actual price is not that high for this stock if you look at price before 2011. However, it has had a good run lately. It went up 66% in 2019 and another 16% so far this year. Another problem is that future estimates are rather low. Analysts do not expect great things from this company in the near future. If you buy this stock, you even do not get a really good dividend yield until it fully recovers.
When I look at analysts’ recommendations, I find Strong Buy (4), Buy (6), and Hold (2). The consensus would be a Strong Buy. The 12 months stock price is $16.08. This implies a total return of 32.68% with 1.63% from dividends and 31.05% from capital gains.
When I look at analysts’ recommendations last year, I found Strong Buy (4), Buy (5), Hold (2) and Underperform (1). The consensus was a Buy. The 12 month stock price consensus was $12.96. This implies a total return of 17.43% with 15.82% from capital gains and 1.61% from dividends based on a stock price of $11.19. What happened was a move to $12.27 which implies a total return of 11.26% with 9.65% from capital gains and 1.61% from dividends. It was not a bad estimate.
There are mixed analysts’ views on Stock Chase. The latest analyst says Do Not Buy because of management and legacy problems. Stock Chase gives this stock 4 stars out of 5. Andrew Walker on Motley Fool says that TransAlta has done a good job of cleaning up the balance sheet in recent years and is on track to generate strong free cash flow in 2022 and beyond. Demetris Afxentiou on Motley Fool says that given its reliable business and investment into its renewable subsidiary, there is a huge long-term upside. The company in a Press Release talk about fourth quarter results. Simply Wall Street on Yahoo Finance looks at insider ownership.
TransAlta Corp is an independent power producer based in Alberta, Canada. The company owns more than 70 power plants in Canada, the Western United States, and Australia. Its web site is here TransAlta Corp.
The last stock I wrote about was about was Enbridge Inc (TSX-ENB, NYSE-ENB) ... learn more. The next stock I will write about will be TC Energy Corp (TSX-TRP, NYSE-TRP) ... learn more on Monday, March 28, 2022 around 5 pm.
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.
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