Motivation for my blog entries can come from unlikely sources. In early May, I received a LinkedIn message from a recruiter at Brookfield Renewables asking if I was interested in a position with their firm. I enjoy my current employer, and have no intention of leaving in the short-term, but it was still very flattering to receive the offer. I also remembered reading about one of my local fellow dividend bloggers having a position in Brookfield Renewables, and decided to dig a bit deeper into the company. Being open to diversifying my holdings into other sectors, I expanded my search parameters to include the renewables sector in Canada, looking to see if other companies in the sector had a dividend growth record.
My research into the renewables sector lead me to the S&P/TSX Renewable Energy and Clean Technology Index that includes 19 companies. Seeing some of the names in the index, I became curious about the criteria to be included as I came recognized a bus manufacturer (New Flyer Industries) and packaging company (Cascades Inc). Turns out the criteria to be included in the index are pretty loose, allowing companies that focus on "reducing or eliminating the negative ecological impacts of their operations, while at the same time improving the productive and responsible use of natural resources". These broad criteria create a big enough gap to drive a New Flyer bus through.
To narrow down the search parameters, I screened the list of 19 constituents for positive 1-year dividend growth and market capitalization in excess of CAD 1 billion. The resulting four matches are included on the summary screen below.
What jumped out at me was that there were no clear bargains with trailing P/E ratios ranging from 19X to 6835X. The relatively cheap TransAlta Renewables has the highest dividend yield (6.2%) and the only free cash flow payout ratio under 100%. My would-be suitor Brookfield Renewables has a nice combination of current yield (5.7%) and 1-year distribution growth (7.2%), but is still in the expansion phase leading to their 135% payout ratio and 400X+ trailing P/E multiple. The negative FCF and awe-inducing P/E multiple are enough to turn me off of Innergex Renewable at this time. Algonquin Power is becoming more interesting to me as I did not realize how much of their business related to renewable energy. Algonquin's relatively high distribution growth rate (10%) and payout ratio just north of 100% make me want to wait for a better entry point than a trailing P/E of 30X.
Although none of the four Canadian renewable energy companies profiled above could currently be considered cheap, they all warrant further consideration for inclusion in a diversified portfolio of investments. Here's hoping the S&P/TSX Renewable Energy and Clean Technology Index continues to expand as our continent shifts away from non-renewable energy sources.
Do you own shares in any companies in the renewables sector?
Hey DiH,
ReplyDeleteIt is always interesting to hear where ppl get investment ideas from. Good to hear that you are enjoying your job and are happy with it.
I own AQN in the space - partly due to the renewable exposure, more so for the water exposure and mostly because of the growth offered. The high multiple is because of the rate at which they are growing both their top and bottom lines. Yes, the trailing PE is 30, but their P/FCF is pretty good at 10.
It's taking a breathe and I am tempted to add more at this level. The company has been a bit too optimistic in the past though and got ahead of themself and had to cut dividends last decade. But so far, things are looking good.
R2R
Always a pleasure to read your take on a company I am interested in. Two of the additional aspects I like about AQN is the fact the distribution is a dividend for tax purposes and they also have a 5% discount if you enroll in the DRIP program. It's tempting for me to initiate a small position on a pullback.
DeleteHave to get around to commenting, but I really enjoyed your 'Do you love your holdings' post. Lots of food for thought! Thanks for stopping by.