Capital Power Corp. CPX-T is a cheap stock with a big dividend. Now, investors with particularly long-term horizons can point to the company’s nuclear ambitions as a third compelling reason to own the shares.
On Monday, the Edmonton-based power producer announced an agreement with Ontario Power Generation to look at developing small modular reactors (SMRs) in Alberta. They will start with a two-year feasibility assessment, with the goal of producing nuclear power by 2035.
“The evaluation of SMRs aligns with the company’s knowledge of the local market and growing concerns around grid reliability, voiced recently by the Alberta government,” Nate Heywood, an analyst at ATB Securities, said in an e-mail.
Granted, 2035 is a long way out for investors who might be more focused on Capital Power’s next quarterly dividend distribution. But the move fits with a company that is transforming itself by investing in cleaner sources of energy and expanding its footprint with deals and developments outside its home province.
Since emerging as a publicly traded company in 2009, Capital Power has increased its generating capacity to 7,500 megawatts from about 1,400 MW, according to CIBC World Markets – underscoring its ambitions to be a bigger power player.
In November, it announced a deal to acquire the La Paloma natural gas-fired generation facility in California, and teamed up with a fund from BlackRock to buy the Harquahala facility in Arizona, both at relatively low prices, according to analysts.
Last month, the company closed a deal to acquire a majority interest in the Frederickson 1 Generating Station, adding a gas-fired facility in Washington State.
“Natural gas assets are key to grid reliability, stability and the proliferation of renewables, and will only be leaned on harder as renewables replace coal and make up a larger percentage of the grid,” Brent Stadler, an analyst at Desjardins Securities, said in a December note.
Capital Power also owns wind and solar assets in North America, and is transforming its Genesee Generating Station in Alberta to reduce carbon emissions, in line with ambitions to have net-zero emissions by 2045.
Canada moves to the forefront in the new age of nuclear power
Monday’s announcement on the company’s potential expansion into nuclear power sent the share price up. It closed at $37.35 in Toronto, up $1.18 or 3.3 per cent.
Yet the flurry of activity in recent months has done little to revive interest in the stock over the longer term: The share price is still down by more than 27 per cent from its high in August, 2022 (not including dividends). Capital Power trails most of its peers within the utilities sector over the past year as well.
Part of this poor performance is because of higher interest rates, which have eroded the attractiveness of dividend stocks next to bonds, guaranteed investment certificates and even money-market funds.
As Capital Power’s share price declined over the past 17 months, its dividend yield climbed to a high of 7 per cent in October. Even after Monday’s rally, the yield is still high, at 6.6 per cent, even as many economists expect interest rates to fall later this year, potentially providing some relief for dividend stocks.
The high yield reflects a stock that remains cheap and out of favour. It could appeal to income-loving investors who can interpret the recent 6-per-cent dividend hike – along with well-telegraphed additional hikes through 2025 and a payout ratio of just 40 per cent – as a sign of confidence.
The stock looks cheap in at least one other way, too. Mr. Stadler said that the EV/EBITDA ratio – a popular valuation metric that compares enterprise value with earnings before interest, taxes, depreciation and amortization – is near a five-year low. That may make the stock a value play that is appealing to investors who bet on beaten-up names.
Capital Power’s interest in nuclear power might not be enough to put the stock on a sustained rebound just yet. But it adds to the company’s strategy of building a diversified slate of assets that can deliver reliable energy with low emissions.
As long-term bets go, it’s a good one.