Is Innergex Renewables (TSE:INE) the Renewable Energy Stock to Buy?

Posted on February 24, 2021 by Mathieu Litalien
Innergex dividend
Innergex stock

The renewable industry is one of the hottest in the market right now, and some Canadian dividend stocks are in the mix. Pro-climate change agendas by governments worldwide have increased investor interest into this industry that was dormant for quite a few years.

If you're new to learning how to buy stocks in Canada, it's very likely you're attracted to this industry. But, is it currently overvalued?

Industry remains attractive to investors despite retreat from all-time highs

The rise started in earnest in 2019 and accelerated in 2020 as President Biden won the U.S. election with a notable climate change agenda. Although the industry has retreated from all-time highs this month, it still remains an attractive opportunity for investors.

One renewable energy stock that doesn’t get quite as much attention as its peers is Innergex Renewables (TSX:INE). This is likely because Innergex is one of the smallest renewables on the TSX Index.

With a market cap of approximately $4.8B, Innergex is a 100% renewable energy company and it operates in three segments:

  • Hydroelectricity: Created by harnessing energy from running water. This type of energy is known to generate large amounts of power and is the most-widely used source of renewable energy today.
  • Wind: Largely characterized by their large turbines, wind energy is one of the fastest growing types of energy in the world.
  • Solar: Once cost-prohibitive, solar is becoming a more viable source of energy and as the company puts it: “is the result of the most abundant and unlimited resource there is, the sun”.

Strong growth prospects

Innergex has operations worldwide and has 75 generating assets with installed capacity of 3,694 MW. The company also has approximately 7,000 MW of capacity in its pipeline of projects with some flagship projects in Hawaii, Saskatchewan, and Texas.

The company’s robust pipeline of projects has enable the company to reach record production numbers. Through the first nine months of 2020, it generated 5,886 GW of energy, up 25% year-over-year. The majority of production increase came from wind and solar power, as it has put a few projects into commission and closed on several acquisitions.

While earnings growth is spotty, analysts expect the company to grow revenue by the mid-teens over the next couple of years.

Canadian Dividend Aristocrat/All Star

Another aspect of the company that might get overlooked, is that it is a reliable dividend growth company. Innergex achieved Canadian Dividend Aristocrat/All-Star status a couple of years ago and has a seven-year dividend growth streak.

The company won’t blow you away with high dividend growth rates, but it has managed to grow the dividend by the low-single digits. Since the company has generated negative earnings, the payout ratio against earnings is nil. Looking forward, it is a hefty 225% based on next year’s estimates.

Is the dividend at risk? I wouldn’t necessarily go out on a limb and say with 100% certainty that its safe. According to the company’s latest presentation, the dividend climbed to 124% of free cash flow. In fact, it has increased every TTM since 2018. 

The company also has a number of construction projects in the works and has a pretty high debt load. While the debt is not all that surprising given the industry in which it operates, the payout ratios definitely pose a red flag.

Worth noting, Innergex is on tap to raise dividends at the end of February. The lack of a raise might be a signal that the company’s financial position is a little stretched. While, the dividend growth streak is a bonus many of its peers have chosen dividend stability over growth.

In fact, Innergex is the only pureplay renewable power generation company that has grown the dividend for more than five consecutive years aside from Brookfield Renewable Partners (TSX:BEP.UN, BEPC). It might be time for the company to follow suit with its peers and prioritize dividend stability vs dividend growth.

All things considered, Innergex has an attractive profile and multiple avenues for growth. Just don’t get too attached to that dividend.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post. Stocktrades Ltd will run advertisements on our posts. These advertisements do not represent an endorsement by us.

Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Premium and the Stocktrades blog.