Normally, investors wouldn’t consider a stock a value idea after moving up 40% in the last year (plus dividends). But Capital Power Corp (TSX:CPX) is still cheap.
Altogether, Capital Power has 18 facilities in operation, generating 3,200 MW of energy annually. Most of these assets are in Alberta, and the company’s largest plants burn coal. Come 2030, Alberta won’t allow it to continue using coal.
The good news is Capital Power will be compensated quite well for the stranding of its assets. The Government of Alberta has agreed to pay the company $52.4 million annually through 2030. Most of the capital will be reinvested in Alberta, with some spent to convert these coal-fired plants into using natural gas.
The company should also see results get better in Alberta. Thanks to province’s weak overall economy, total power demand dipped in 2016. Demand should pick back up in 2017-18, which will further increase earnings.
Although 2016 looks to be disappointing on a free cash flow perspective – that metric dropped from $279 million in 2015 to $62 million in 2016 – most of the decline was due to increased capital expenditures from building new projects.
Thanks to a February acquisition, cash flow is projected to increase in 2017 to $455 million before capital expenditures.
The company’s current market cap is $2.45 billion, putting shares at just 5.4 times forward cash flow.
While waiting for shares to go up, Capital Power investors are getting one of the best dividends out there. Shares currently yield 6.2% and management projects the dividend will increase 15% between now and 2019.
