At first glance it doesn’t seem like much of a contest. It’s obvious TransAlta Renewables Inc. (TSX:RNW) is a much better dividend choice than TransAlta Corporation (TSX:TA)(NYSE:TAC).
Renewables pays a 6.2% yield while its parent company only pays a 2.1% dividend. Besides, TransAlta has already cut its dividend -- twice, in fact, with cuts in both 2014 and 2016 -- while Renewables has promised to hike its payout come 2017.
Renewables also provides nearly three times as much income today.
But TransAlta does have one thing going for it, and that’s potential dividend growth. It’s on pace to generate approximately $300 million in free cash flow in 2016, while paying out less than $100 million in dividends.
Free cash flow will likely go up in 2017 as the company starts receiving $37 million per year from the Alberta government as compensation for the province’s decision to end coal-fired power by 2030. A modest recovery in power prices would also help the bottom line, which is something the company expects over the next couple of years.
TransAlta does have a significant amount of debt, checking in at nearly $5 billion including preferred stock. It has stated the priority over the next couple of years will be debt repayment. But I wouldn’t be surprised if the company spent a little money to give beleaguered shareholders an increase in their dividend.
The bottom line? TransAlta Renewables offers a good, sustainable dividend today. But when it comes to dividend growth, the parent company could offer the better potential. TransAlta should eventually get back to the point where it’s a dividend stalwart.
