Many dividend investors worry about high yields, thinking the market knows something they don’t.
Capital Power Corp (TSX:CPX) was one stock plagued with such worries, although its struggles were very public. The Alberta-based power producer has an ownership interest in 18 power plants across Canada and the United States, with more than 3,200 MW of capacity. Unfortunately, much of that capacity is tied up in six coal-fired plants in Alberta.
Alberta recently passed a law that will ban all coal-fired power in the province by 2030. All six of Capital Power’s plants were scheduled to be decommissioned much later than that, with the furthest slated to operate until 2061 under the old rules.
In exchange for stranding these assets, Alberta’s NDP government pledged to make reparation payments to the impacted power companies. Investors just didn’t know how much the payments would be.
We got our answer last week. Capital Power will be receiving $52.4 million annually from the government until 2030. Shares shot sharply higher on the news, closing the trading day more than 10% higher.
The announcement was also good news for Capital Power’s dividend. The company currently pays $0.39 per share each quarter, good enough for a 6.8% yield. That’s one of the best yields out there.
Over the last year, Capital Power posted $264 million in free cash flow. Add in another $52.4 million, and the company cut its payout ratio from 56.8% to 47.4%. That’s an outstanding payout ratio for a company with such a high yield.
