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 Enghouse Systems right now?

Before you buy stock in Enghouse Systems, 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 Enghouse Systems 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 $20,697.16!*

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 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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

Canadian dollars are printed
Dividend Stocks

How I’d Turn $12,000 in My TFSA Into a Money-Making Machine for Long-Term Growth

With $12,000 spread across high-quality dividend stocks like CNQ and goeasy, you could build a TFSA portfolio that does more…

Read more »

stocks climbing green bull market
Dividend Stocks

A 9% Dividend Stock Paying Cash Every Month, and Perfect in a Volatile Market

It's a volatile time, but this dividend stock can help you through it.

Read more »

Canada day banner background design of flag
Dividend Stocks

Top Canadian Stocks for a $7,000 Investment Today

These Canadian stocks are trading in the green year-to-date and have consistently outperformed the broader markets with their returns.

Read more »

Car, EV, electric vehicle
Dividend Stocks

Carney Cuts the Carbon Tax: What to Do With Your Savings

You can invest in stocks like Alimentation Couche-Tard Inc (TSX:ATD) with your carbon tax savings.

Read more »

dividend growth for passive income
Dividend Stocks

Boost Your 2025 Returns: 4 High-Yield Canadian Dividend Champions

These high-yield dividend stocks have reliable operations and generate significant passive income, making them four of the best to buy…

Read more »

Data center servers IT workers
Dividend Stocks

1 Magnificent Canadian Stock Down 44% as AI Investing Heats up

This Canadian stock not only has growth, but in one of the best growth areas right now.

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Tariff-Resilient Income: 2 Canadian Dividend Stocks to Weather Economic Uncertainty

Emera (TSX:EMA) and another dividend stock are worth buying despite tariff threats.

Read more »

Dam of hydroelectric power plant in Canadian Rockies
Dividend Stocks

Is Brookfield Renewable Stock a Buy for its 6.7% Dividend Yield?

Brookfield Renewable is a TSX dividend stock that offers shareholders a dividend yield of almost 7% in April 2025.

Read more »