Reader Request - Transalta Corporation (TSE:TA)
17 August 2007Dividends Matter reader Peter has requested that we have a look at Transalta Corporation which trades on the TSE under the symbol TA. Is this a contender for our portfolio of superior dividend yielding stocks? Let’s find out.
Company Profile:
From the Transalta Corporation website
TransAlta is a power generation and wholesale marketing company. We generate electricity – fueled by coal, natural gas, water, geothermal energy and wind – and sell it to wholesale customers in various regions of Canada, the U.S., Mexico and Australia.
Market capitalization is $5.72B.
Company Fundamentals:
The return on invested capital numbers are nothing to write home about. The 5 year average ROIC is 3.70%. On the bright side, last year’s ROIC was 8.3%.
Return on equity has been fairly consistent with the 10 year average ROE at 8.46% and the 5 year average ROE at 7.26%. Management has been able to effectively use debt to provide this ROE. Total debt makes up 53.6% of capital.
As for equity growth rates, there is not much to talk about. The 9 year equity growth rate is 2.4%. And that is as good as it gets. The 5 year rate is 0.72% and the 3 year rate is -2.12%. Last year’s equity growth rate was -6.27%. Definitely headed in the wrong direction.
Earnings per share growth rate is interesting because it is reversed from the equity growth rates. Where the equity growth rates trend downward, the EPS growth rates trend upwards! The 9 year average rate is -1.83%. That improves to 2.9% over 5 years. Massive jump to 18.99% over the last 3 years! As you can see, the equity growth rate and EPS growth rates are heading in opposite directions.
Sales growth rates have withered to nothing. Over the last 2 years, the sales growth rates have been 0.01% and -1.48%.
So far, this looks like a company to stay far away from.
Dividend Fundamentals:
The current dividend yield is 3.45%. That is an above average yield as compared to the S&P/TSX Composite Index which sits at 2.61%.
And the dividend growth rate seems to be missing! It has not increased over the last 7 years. At least it hasn’t decreased either!
The dividend payout ratio is extremely high. The current dividend payout ratio is 86.21%. Back in 1997, the payout ratio was 85.96%. It has in fact exceeded 100% a few times over the last 10 years.
Interestingly enough, cash flow growth rates are trending upwards. The 5 year average rate is 3.43%. The 3 year rate is 7.93% and last year’s cash flow growth rate was 10.94%.
This seals the deal. Definitely not a member of a portfolio of superior dividend yielding stocks.
Valuation Models:
Let’s have some fun and put a model price on this dividend payer.
You might think that a dividend yield of 3.45% is fairly decent. In fact, the current dividend yield is not even close the 5 year average LOW dividend yield which is 4.42%. The 5 year average high dividend yield is 5.86%! Since the dividend hasn’t changed in 7 years, the only thing that changes is the price of the stock itself. If we demand 5.86% yield, then the model price is $17.06. At a current price of $28.96, this stock is currently overpriced by almost 70%!
And Mr. Graham would absolutely agree. The Graham number is $16.18 which means a premium of almost 79%.
As for my discounted present value method, I was not able to come up with a reasonable model price. Why you ask? Because by using the historical equity growth rates to forecast my future EPS growth rates, I would use the 5 year average equity growth rate of 0.72%. And with a growth rate like that, what kind of P/E should an investor be willing to allow? I would argue twice that amount or a P/E of 1.44. The current P/E is a whopping 29.86 and is actually at an all time high.
If I try running these numbers, I get a ridiculously low number.
You can check my TA calculations here.
Here is the 1 year stock price chart:
You can see that it has had a very nice run up since around March. In fact, you could not buy it at our model price at any time in the last 12 months.
Conclusion:
Not much else to say. Although this dividend is consistent, there is no growth in the dividend and inflation will slowly eat away at it. The high dividend payout ratio of 86% doesn’t give management much room to maneuver either. Definitely not a contender for a portfolio of superior dividend yielding stocks.
Full Disclosure: And the most painful part of this post is that I do own shares in TA. During my DRIP phase a few years ago, I was enrolling in Canadian DRIPs and it didn’t matter which ones. There is such a small selection of Canadian DRIPs that I just accumulated the ones I could get my hands on.
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on August 18th, 2007 at 8:15 am
Thanks for the excellent analysis and I really enjoy reading your blog. Would you please take a look at Ensign Energy Services Inc.(TSE: ESI) if you don’t mind?
Have a great weekend!
Alice