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In the past two years, companies in capital-intensive sectors like energy, utilities, and real estate have lagged behind the broader markets significantly. Investors are concerned about the impact of rising interest rates on profit margins, leading to a sell-off across multiple sectors.
Among TSX-listed stocks affected by the rising cost of debt are Algonquin Power & Utilities and Northwest Healthcare, which were compelled to cut dividends, resulting in notable declines in share prices. Another TSX stock feeling the pressure is Northland Power (TSX:NPI), which has dropped by 52% from its all-time highs. However, this pullback has boosted its dividend yield to 5%. Let's delve into whether investing in NPI stock for its attractive dividend yield in 2024 is a wise choice.
An Overview of Northland Power
With a market cap of $6.1 billion, Northland Power is an independent power producer involved in developing, building, owning, and operating clean energy projects across the Americas, Europe, and Asia. It generates electricity from renewable sources like wind, hydro, and solar, as well as from natural gas and biomass.
The company has an ownership stake in 3.4 gigawatts of operating generating capacity and a substantial pipeline of projects under construction and development, totaling 15 gigawatts of potential capacity. Northland Power aims to enhance shareholder value by investing in projects with long-term revenue contracts, ensuring stable cash flows through business cycles. Its diversified portfolio comprises high-quality power infrastructure assets with an average contracted revenue life exceeding 14 years.
Q3 2023 Performance
In Q3 2023, Northland Power reported a decrease in sales to $513 million from $556 million in the same period last year. Gross profit declined by 5% to $458 million, while adjusted EBITDA stood at $267 million compared to $290 million year-over-year.
The company reported adjusted free cash flow per share of $0.25 in Q3, while paying out a monthly dividend of $0.10 per share, resulting in a payout ratio of over 100%, which is unsustainable. Northland Power needs to lower its payout ratio to reinvest in growth projects, reduce balance sheet debt, and pursue accretive acquisitions. Despite the high payout ratio in Q3, the company reported a free cash flow of $1.22 per share over the last three quarters, resulting in a lower payout ratio of 74%.
Target Price and Outlook
Although Northland Power is not known for dividend growth, it boasts a robust clean energy portfolio and continues to target key markets for offshore wind development in Europe and Asia, alongside expanding its inshore footprint in North America and Europe.
With a forward earnings multiple of 17.7 times, NPI stock appears reasonably priced if it can consistently expand cash flows. Analysts remain bullish, forecasting a 33% surge in NPI stock over the next 12 months.
