August 27

Value and Growth – You Can Get the Best of Both Worlds with This Stock

**The writer of this article may hold positions in the stocks listed below**


It seems like everything is a competition.

Do you like Coke or Pepsi better? How about cats or dogs? Is hockey or football the preferred sport on your television screen? And I shouldn’t forget about the most dividing topic of all: do you like pineapple on pizza?

It seems investors are divided into two camps as well. On the one side we have growth investors, folks who understand great returns come from Canadian stocks that are capable of multiplying at a quick rate. They square off against value investors, people who want to own great companies. They just don’t want to pay the going rate for them.

I’d like to profile a stock that offers investors the best of both worlds. It’s trading at a dirt-cheap valuation despite offering an interesting growth profile. It also pays a juicy dividend. Let’s take a closer look.

A company in transition

2015 was not a good year for Capital Power Corp (TSX:CPX).

Most of the power generator’s assets were coal-fired power plants located in Alberta. These plants benefited from low input costs and long approved lives ahead of them, but a weak power market in the province wasn’t helping.

Then, one day, the government changed the rules. The newly elected NDP party made good on one of its election promises when then-Premier Rachel Notley announced Alberta would be coal-free by 2030. Capital Power shares tanked on the news, bottoming at just over $15 each, which represented a nearly 50% haircut from just 18 months earlier.

Some companies might have put themselves up for sale when dealing with such a setback or entrenched themselves while looking for a way to pressure the government to change its mind. Capital Power took a different approach. It went on the offensive, using its pristine balance sheet to fund the acquisition of new greener assets.

The company acquired natural gas-fired plants in British Columbia, Ontario, and across the United States. The company also developed wind-driven and solar power facilities across North America. It even has two plants in British Columbia that use waste as a fuel. The total portfolio is now capable of generating nearly 6,000 MW of energy with an additional 900 MW in the development pipeline.

The company is also spending on converting its existing coal-fired facilities in Alberta to plants that will be able to use natural gas as a fuel.

Put this all together and we have a company rapidly moving away from coal with the balance sheet flexibility to acquire further assets. For instance, Capital Power just acquired Goreway Power Station, a natural gas-fired facility in Brampton, Ontario.

Since 2014, when the company was forced to embark on this path, it has grown adjusted funds from operations (AFFO) by 12% annually. Management expects growth to continue, too.

The value equation

There are two things every value investor wants to see – a cheap price-to-earnings ratio and a fat dividend yield.

Let’s start with Capital Power’s dividend. The current payout is a robust 6.2%, which I’m sure already has some value investors excited. But it gets better. The company has managed to increase its dividend by an average of 7% annually since 2013, and management has already told investors to expect 7% yearly raises through 2021.

Now let’s move on to valuation. Capital Power uses AFFO as a representation of its true earnings power. The company projects it’ll earn $4.46 per share in AFFO in 2019. Shares trade hands at a little over $31 each as I write this. That gives us a price-to-AFFO ratio of under 7x. You won’t find many stocks cheaper.

Simply put, there are very few stocks in Canada today that offer solid growth with a low valuation. If you want the best of both worlds, then Capital Power should be high on your list.

About the author

Nelson is a dividend value investor who insists on buying great dividend-paying companies when they are reasonably priced. He has been investing for more than 15 years and is now primarily focused on helping other investors build up a dependable stream of passive income. When he's not studying the markets, Nelson can be found relaxing with his wife and cat or watching the Toronto Blue Jays.

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