Looking for a relatively low-risk stock with good growth potential, a rising dividend and a planet-friendly business model? The answer could be blowing in the wind.
Boralex Inc. is a renewable power producer with most of its operations in Canada and France, and a small but growing presence in the United States. The Montreal-based company generates the vast majority (89 per cent) of its electricity from wind, with smaller contributions from hydro (8 per cent), thermal (2 per cent) and solar (1 per cent).
Boralex’s dividend isn’t huge – the stock currently yields about 3.3 per cent – but its cash payout has been rising steadily and will likely continue to grow as the company expands its generating portfolio. For conservative investors seeking income and growth, Boralex could be a nice addition to a well-diversified portfolio. Here’s why.
Predictable cash flows
Boralex sells 98 per cent of its electricity under long-term power purchase agreements (PPAs), which have an average weighted remaining life of 13 years and are often indexed to inflation. The heavily contracted nature of Boralex’s business limits the company’s exposure to fluctuating electricity prices and makes for reliable cash flows. Mother Nature isn’t always predictable, unfortunately: In France, where Boralex is the largest independent producer of onshore wind power, the company was hurt by below-average wind speeds in 2018. Boralex’s stock tumbled 28 per cent last year, but as wind speeds in France have recovered, the shares have also rebounded. They’re still well off their 2018 high of $24.78, however, closing on Tuesday at $19.92.
A subdued rate environment
When interest rates rise, shares of power producers typically fall. That’s because borrowing costs go up, making it more expensive to build new generating facilities, and because the stable nature of power companies’ cash flows makes their shares behave like bonds, whose prices move in the opposite direction to rates. But with central banks adopting a more dovish position on interest rates amid trade wars and slowing global growth, interest-sensitive stocks such as Boralex now have the wind at their backs. “If rates remain relatively stable or decline further from current levels, we believe this should support low-cost financing for large-scale, capital-intensive investment projects across the sector, thereby supporting the overall growth outlook for companies in our coverage universe,” Industrial Alliance Securities analyst Jeremy Rosenfield said in a recent note. He reiterated a “strong buy” rating on Boralex and hiked his price target to $24 from $23.
A growing generation portfolio
Boralex has a solid growth outlook, particularly in France where supportive government policies and an expected shift away from nuclear generation are creating opportunities for renewable power producers. “Boralex is in a good position to continue to grow in France by developing small to mid-sized projects and given its incumbent position as the first and largest independent power producer in the region,” CIBC World Markets analyst Mark Jarvi, who has an “outperformer” rating and $24 price target on Boralex, said in a note. Boralex is also aiming to boost its presence in the United States, with a focus on solar projects in New York State where “longer term, this market opportunity could be quite robust,” Mr. Jarvi said. Currently, Boralex’s generating capacity is nearly 2,000 megawatts. The company has more than 100 MW of additional generation under construction or ready to build, and a pipeline of 2,500 MW of potential projects in the “early,” “middle” and “advanced” planning stages.
More cash for dividends
At its investor day in June, Boralex said it expects to achieve discretionary cash flow – also known as adjusted funds from operations (AFFO) – of $140-million to $150-million by 2023. This would represent compound annual growth of 20 per cent from AFFO of $59-million in 2018, when results were depressed by generation well below long-term averages. If 2018 had been an average year, AFFO would have been about $85-million, and the projected annual growth rate in AFFO through 2023 would be 11 per cent to 12 per cent, Desjardins Securities analyst Bill Cabel said in a note. That’s still a solid growth rate, and if Boralex achieves its 2023 AFFO target, its dividend could rise to between 87 cents and 93 cents a share annually in 2023 – up from 66 cents currently – Mr. Cabel said. This assumes Boralex does not issue additional shares and keeps its AFFO payout ratio in its target range of 40 per cent to 60 per cent. In his financial model, Mr. Rosenfield of Industrial Alliance projects that Boralex’s dividend will grow to 80 cents by 2023.
Boralex is not without risks. Even though the company has minimal exposure to electricity prices, it is affected by fluctuations in wind and hydrological conditions and faces uncertainties surrounding the timing and financing of infrastructure projects. What’s more, if interest rates were to suddenly spike, the stock could suffer. Keeping those risks in mind, Boralex offers a solid dividend that will very likely grow. As a bonus, it’s an investment you can feel good about.
Remember to do your own due diligence before investing in any security.
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