TransAlta Corporation: A Turnaround Story Trading at a Bargain Price

TransAlta Corporation (TSX:TA)(NYSE:TAC) has been punished to its cheapest valuation in five years. After cutting its hefty dividend, the company can now be this year’s turnaround story.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

TransAlta Corporation (TSX:TA)(NYSE:TAC) is an Alberta-based power-generation company that’s been hammered over the past five years for all the right reasons. It has had weak revenue due to low regional power prices, weak oil-patch activity flattening demand, and a newly elected provincial government which is intent on phasing out coal power generation by 2030.

The company has slashed its annual dividend from $1.16 per year to less than $0.12 per year to free up cash and invest internally to convert its existing coal plants into gas plants.

At this point, the company is trading so cheaply that a prudent investor could have significant upside at today’s valuation. Not only can the company convert to a stable, dividend-paying utility company, but there are three specific points that can lead to a potential further surge in share price.

First, the company currently holds 62% of TransAlta Renewables (TSX:RNW), a stake worth ~$1.9 billion. This asset is important for two reasons: a) investing in renewable energy has become a hot-button issue, and support has been one of the Trudeau government’s mandates; it is safe to say that both legislative support and funding for this sector will not be cut any time soon; and b) TransAlta Renewables is on track to pay out just under $200 million this year in dividends; these distributions can be channeled back into TransAlta’s free cash flow and its investments.

Second, TransAlta is still maintaining a small dividend worth roughly $100 million each year. It is my speculation that this dividend is currently being maintained to keep some institutional investors interested in maintaining a stake in the company. However, cutting the whole dividend could free up additional cash flow to cover for unexpected expenses and/or help manage the company’s debt.

And third, the Albertan government has just settled with three utility companies (including TransAlta) and will pay $97 million per year until 2030 in return for the early phasing out of six coal plants. This was a heavy uncertainty surrounding the company which has now been solved. As the future of the company becomes more clear, and as the investments come to fruition, the company’s shares will likely trade at a fairer cash flow valuation.

TransAlta’s shares have been punished so heavily over the years that the company can be bought at a bargain-bin price. Foolish investors who can buy stock at a reasonable level could have tremendous upside if the company properly executes its transformation and is able to afford to once again churn out a healthy dividend.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jeff Ho has no position in any stocks mentioned.

More on Energy Stocks

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Up by 25%: Is Cenovus Stock a Good Buy in February 2023?

After a powerful bullish run, the energy sector in Canada has finally stabilized, and it might be ripe for a…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Cenovus Stock: Here’s What’s Coming Next

Cenovus stock has rallied strong along with commodity prices. Expect more as the company continues to digest its Husky acquisition.

Read more »

A stock price graph showing growth over time
Energy Stocks

What Share Buybacks Mean for Energy Investors in 2023 and 1 TSX Stock That Could Outperform

Will TSX energy stocks continue to delight investors in 2023?

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

2 Top TSX Energy Stocks That Could Beat Vermilion Energy

TSX energy stocks will likely outperform in 2023. But not all are equally well placed.

Read more »

Gas pipelines
Energy Stocks

Suncor Stock: How High Could it Go in 2023?

Suncor stock is starting off 2023 as an undervalued underdog, but after a record year, the company is standing strong…

Read more »

oil and natural gas
Energy Stocks

Should You Buy Emera Stock in February 2023?

Emera stock has returned 9% compounded annually in the last 10 years, including dividends.

Read more »

grow money, wealth build
Energy Stocks

TFSA: Investing $8,000 in Enbridge Stock Today Could Bring $500 in Tax-Free Dividends

TSX dividend stocks such as Enbridge can be held in a TFSA to allow shareholders generate tax-free dividend income each…

Read more »

oil and natural gas
Energy Stocks

3 TSX Energy Stocks to Buy if the Slump Continues

Three energy stocks trading at depressed prices due to the oil slump are buying opportunities before demand returns.

Read more »