Investors can view Northland Power Inc. (TSX:NPI) as a “safe” way to play the clean-energy investment theme, a theme that one can reasonably expect to be very profitable for those investors who invest in it. Northland Power has been around since 1987 and is a producer of solar, wind, and thermal power.
Payout ratio headed down
Due to heavy capital spending on the company’s two offshore wind projects in Europe, Gemini and Nordsee, the payout ratio is expected to remain above 100% until 2017, at which time these projects will be completed and the company will experience a bump in EBITDA. Northland has almost 700 megawatts of projects currently under construction. This compares to its current 1,332 megawatts in operation.
In the meantime, management has been and continues to be committed to maintaining the dividend and has enough liquidity to bridge the gap. The company has a good track record in this regard. The payout ratio was much higher in the 2009-2014 period and the dividend was successfully maintained.
Bringing down the payout ratio to well under 100% will certainly change investors’ perceptions of and comfort level with the company as the high payout ratio is an obstacle for many investors when considering Northland Power for dividend income or as a way to gain exposure to clean energy.
Increase in clean-energy exposure
Northland Power is positioned to reap the rewards of the shift towards clean energy. In 2018 clean-energy production will be a much larger portion of the company’s EBITDA.
The breakdown of the company’s EBITDA in 2015 was 41% thermal, 31% natural gas/biomass, 15% solar, and 13% onshore wind. In 2018 this breakdown will look very different. Offshore wind will be the biggest source of EBITDA at 61%, followed by thermal at 18%, solar at 8%, onshore wind at 7%, and natural gas/biomass at 6%.
Final thoughts
Add to this the fact that 98% of revenues are from long-term power contracts with a weighted average term of over 14 years and the fact that management owns 35% of shares outstanding, which demonstrates that they are well aligned with shareholder interests, and the investment case becomes more and more compelling.
Northland Power currently has a dividend yield of 6.22% and the stock has a one year return of 3.46%, not including the dividend. Including the dividend to get a total return, we see that the stock has actually returned almost 10% in the last year. This compares to the market return of -16%.
