TransAlta Corporation: Is This 13% Dividend Sustainable?

TransAlta Corporation (TSX:TA)(NYSE:TAC) has the highest-yielding dividend on the S&P/TSX 60. How long will this last?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

TransAlta Corporation (TSX:TA)(NYSE:TAC) has by far the highest-yielding dividend on the S&P/TSX 60 with its $0.18 quarterly payout yielding nearly 13%.

Of course, whenever a dividend yields more than 10%, you have to question its sustainability. So will this payout hold up?

A struggling business

TransAlta’s high yield has been caused primarily by a falling stock price. So far this year the company’s Canadian-listed shares have fallen by nearly 50%. One reason for this has been the new NDP government and its plans to curb carbon emissions.

But the main cause of TransAlta’s downfall has been lower power prices. To put some perspective on this, the power price in Alberta fell by nearly 60% year over year in the most recent quarter. Hedging has offset much of that decline, but of course that strategy can only last for so long.

The numbers

Through three quarters this year TransAlta has generated roughly $140 million in “comparable free cash flow.” Meanwhile, the company’s dividend costs about $50 million per quarter. At first glance, TransAlta is nearly able to cover its dividend with cash flow.

But in reality the news is much worse. TransAlta has locked in fixed pricing for nearly 90% of its power in 2015 with a fixed price of $50 per MWh in Alberta (nearly double the market price). Many of these hedges start to roll over in 2018, meaning that unless power prices start to recover meaningfully, cash flow will seriously deteriorate.

Making matters worse, TransAlta’s balance sheet has become a major concern, with total debt of nearly $4.4 billion. The company has a credit rating one notch above junk from all three major credit rating agencies. That’s not the kind of situation a dividend investor wants to be in.

The verdict

If the last 12 months have taught investors anything, it’s that we shouldn’t be chasing the highest-yielding dividends.

If you want to make a bet on Albertan power prices–perhaps you believe that the NDP’s environmental plans will result in skyrocketing rates–then TransAlta would be one (risky) way to do so. Otherwise, you should look elsewhere for dividends.

Should you invest $1,000 in TransAlta right now?

Before you buy stock in TransAlta, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and TransAlta wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

Man in fedora smiles into camera
Dividend Stocks

How I’d Build a $20,000 Retirement Portfolio With These 3 TSX Dividend All-Stars

If you're worried about returns and want to focus on dividends, these dividend stocks are the first to consider.

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

If I Could Only Buy and Hold a Single Canadian Stock, This Would Be It

Here's why this high-quality defensive growth stock is one of the best Canadian companies to buy now and hold for…

Read more »

Concept of multiple streams of income
Dividend Stocks

3 Safe Dividend Stocks for Retirees

These three Canadian stocks are ideal for retirees due to their solid cash flows, consistent dividend growth, and healthy growth…

Read more »

dividends can compound over time
Dividend Stocks

3 Canadian Market Leaders Where I’d Invest $10,000 for Sustained Performance

Market leaders like Alimentation Couche-Tard Inc (TSX:ATD) are worth an investment.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Allocate $12,000 Across Canadian Value Stocks for Retirement Planning

Suncor Energy Inc (TSX:SU) is a Canadian energy stock worth investigating.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Stocks You Can Buy Now and Get Monthly Payouts From for Decades

Are you looking for monthly payouts? There are more than a few great investments that can fuel a monthly income…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Where I’d Put $1,000 Right Away in 2 Top Canadian Stocks for Growth

These two Canadian stocks are strong options and have been for decades, and that's not going to change anytime soon.

Read more »