In today’s world of low interest rates, dividend investors are often presented with a difficult decision. They can either settle for lower, more secure dividends or take a little risk and add to their yield.
Sometimes, a stock comes along that offers both a strong current yield and the stability of a low payout ratio, indicating the yield is safe. Investors are getting that combination with Capital Power (TSX:CPX).
Capital Power primarily owns coal-fired power plants in the province of Alberta. The government recently announced a plan for the province’s energy to be 100% coal-free by 2030. This is obviously bad news for Capital Power.
But it’s not all bad. Shares of the company have more than priced in this bad news, sinking to a level almost 30% below book value. The company is also quite cheap on a price-to-free cash flow perspective, trading at just 5.9 times trailing free cash flow.
In 2015, the company earned approximately $340 million in free cash flow while paying out $128 million in dividends. That’s a payout ratio of just 37.6%, which is actually slated to go down in 2016 because the company is aggressively buying back shares.
Management is also in negotiations with Alberta’s government for a payout compensating it for a loss of life for its assets. Management expects the payout to approximately be book value in 2030, a nice prize considering shares trade at such a discount to book value today.
Capital Power shares trade hands on the Toronto Stock Exchange for $19.79. The quarterly dividend is $0.37 per share for a 7.4% annual yield.
