Canadian Stocks Analysis

Thomson-Reuters (TRI.TO) – Anything but Boring

Thomson-Reuters (TRI.TO) seems pretty boring. After all, software and services for lawyers, accountants, and corporations don’t make us jump to our feet excitedly. However, with a market cap of $110B CAD, 31 consecutive years of dividend increases, and 5-year total returns of 200%, Thomson-Reuters is an industrial stock that is anything but boring.

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Formed in 2008 with the merger of Thomson and Reuters, TRI.TO is mostly known to the general public for its news service and media, but this only represents a few percentage points of its total revenue. Thomson-Reuters’s largest business is selling complex software and services for the legal profession (42% of its revenue), accounting profession (20-25%), and corporations (20-25%). The company was also in the financial data service, with Refinitiv, which it sold to the London Stock Exchange in 2019.

TRI’s Legal Professionals segment sells research and workflow products to law firms and governments. The Tax & Accounting Professionals segment does the same, but for tax, accounting and audit professionals in accounting firms. Its Corporates segment sells a full suite of content-driven technology solutions for small businesses all the way to multinational organizations, including the seven global accounting firms.

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What’s to like about Thomson-Reuters?

TRI’s generates 80% of its revenue from subscription-based services; this predictable revenue and cash flow is great, as long as the customers stick around. This brings us another strength of Thomson-Reuters: its sticky business model. It sells products and services for complex and regulated domains such as law and accounting.

Through its WestLaw business unit, TRI offers an important service to lawyers. Law firms don’t have the time to jump from one provider to another. With WestLaw and Checkpoint, the tax & accounting software, Thomson-Reuters offers top-of-the-line software to two stable industries. Implementing and learning these services required a high degree if involvement from both TRI and the customers, which tends to cement the relationship between them.

This large customer base to offer cross-selling opportunities. Corporate clients have legal and accounting departments, law firms have accounting departments, etc.

The company generates steady organic growth throughout all segments. The pivot towards cloud-based software should allow it to lower acquisition costs while keeping its existing customer base. The complexity of its fields of business provides a strong barrier to entry against competitors. TRI is well-diversified geographically and enjoys a strong brand name.

Thomson-Reuters revenue, earning per share, and dividend payments evolution from 2014 to 2024 — TRI.TO revenue, earnings per share (EPS), and dividend payments for the last 10 years

The company is heavily investing in innovation, particularly in generative AI, to capitalize on the rising complexity of regulatory compliance and the demand for AI-driven solutions. It made notable progress with products like Westlaw Precision and CoCounsel, and the integration of Pagero to enhance corporate tax and audit capabilities.

Last quarter, Thomson Reuters reported solid results with revenue up 8.5% and EPS up 36%. Total organic revenue growth was 9%, with the “Big 3” segments growing by 10%, driven by strong transactional revenue and seasonal offerings. By segment, growth was as follows: Legal +7%, Corporate +12%, and Tax & Accounting +14%.

Potential Risks for TRI.TO

Selling its Financial and Risk (FR) segment brought in a good amount of cash, but reduced TRI’s business diversification. Following the transaction, TRI’s legal services now represent close to half of their revenues. While this segment is quite stable, it does not show rapid growth. A new technology emerging disrupting TRI’s financial legal services isn’t impossible either. TRI is an important shareholder of the London Stock Exchange (LSE) with a 15% stake. This participation is subject to market fluctuations and highly cyclical volumes.

While TRI counts on its Big 3 segments, the rest of its businesses (news and print) could adversely affect margins and slow overall growth. Finally, we saw TRI’S margin being affected by higher inflation in recent quarters. Multiyear contracts take time to reflect price increases.

TRI.TO Dividend Growth Perspective

Thomson Reuters has increased its dividend every year since 1993, but its dividend growth rate is not very impressive.

Selling Refinitiv in 2019 brought in a healthy infusion of cash into the business. Management bought back shares and authorized another 5M in share buybacks. An investor can expect a low single-digit dividend growth rate from now on, perhaps with nice surprises along the way as we were in 2022 with the 10% dividend increase, followed by another one in 2023. TRI did not disappoint in 2024 with another 10% increase.

Thomson-Reuters pays its dividend in USD.

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Final Thoughts on Thomson-Reuters

At 1.25% dividend yield, Thomson-Reuters is a low yield stock. It is also high growth. Total returns over 5 years were 200%! TRI has a stable business model that generates consistent cash flow. With its yearly dividend increased, TRI management is showing its confidence for the future.

Management increased the dividend by 10% in early 2024 and expects to buy back for $1B worth of share. Full-year 2024 outlook expects organic revenue growth of approximately 6%.

TRI.TO stock is trading at a high valuation. It’s trading at a lower P/E ratio than its five-year average, but a P/E ratio of 33 and a Fwd P/E ratio of 44 might give you reason to pause. With market expectations high, will Thomson-Reuter be able to innovate to keep high-single digit revenue growth going? It’s certainly worth a look.

Foundational Stocks: TFI International (TFII.TO)

A foundational stock, or core holding, is one you can buy and forget about for 10 years without worry. TFI International (TFII.TO) is such a stock. A sleep-well-at-night investment you know will be around 10 years from now and give you growth. Find out more about TFII.

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TFI International Business Model

TFI International is one of the largest trucking companies in North America. Its segments include Package and Courier, Less-Than-Truckload, Less-Than-Truckload, and Logistics.

Package and Courier picks up, transports, and delivers items across North America. Less-Than-Truckload picks up small loads, consolidates, transports, and delivers them. The Truckload segment offers conventional and specialized truckload services, including flatbed trucks, tanks, dumps, and oversized. It offers specialized trailers and a million-plus square feet of industrial warehousing space. Logistics provides asset-light logistical services, including brokerage, freight forwarding, transportation management, and small package parcel delivery. TFII hauls compostable and recyclable materials and offers residential waste management services.

With its size and vast network, it enjoys economies of scale, giving it an edge over the competition. While it competes with lower-cost rail transportation, the flexibility of truck transport means there will always be demand.

Another benefit of TFII’s size is that it can buy smaller competitors to fuel its growth. It has completed over 80 acquisitions since 2008.

TFII.TO Investment Thesis

Since TFI International is expanding, it might be time to invest and ride with them for a while. It made a wise move to expand outside Canada since the U.S. and Mexican economies have great potential.

With a larger fleet, TFI will be ready to pick up any available steady growth. Investing in a leader in Canada and North America is a safe bet for any investor looking to build a dividend growth portfolio. The company displays an appetite for further growth by acquisition that bodes well for the years to come. TFI completed the major acquisition of UPS Freight in April 2021 and it’s already a transformational success. The company is expanding its margins as it benefits from additional economies of scale and the network effect.

Below is TFII’s stock price evolution over 10 years, as well as its revenue, EPS, and dividend growth. Note that what looks like a dividend cut in the dividend triangle graph in April 2021 was really a conversion to USD when TFII started paying its dividend in US currency.

TFII could see some headwinds for a bit as many economists expect a recession. However, this also means TFII should remain in a solid position to make more acquisitions as smaller competitors may struggle in this economy.

Potential Risks for TFII

While road transportation beats railroads in flexibility, railroads win on cost. The transportation industry is highly cyclical; stock values could suffer in downturns. Oil prices affect the trucking industry; there is a limit in fuel surcharges companies can add to their bill.

Big fish eating little fish. — TFII will need to gobble up more smaller companies

TFII will have to identify other potential mergers and acquisitions transactions to ensure continued earnings growth. The organic trucking business stay cyclical in the future. The next time we hit a recession, the stock price could drop rapidly. Remember that TFII is a volatile stock. On one earnings day, the stock price fell 8% on weaker-than-expected results. Finally, if there is a tariff war in North America, TFII will be stuck in the middle.

TFII Dividend Growth Perspective

TFII has had consecutive dividend increases since 2016. While it has a 5-year dividend growth rate over 13% (CAGR), the payout ratios remain low. This leaves much room for increases in its dividend payout. We would have liked to see a smoother trend for earnings, but the dividend payouts aren’t at risk for now. In 2023, TFII rewarded shareholders with a dividend increase of 14%, and another one of 12.5% in 2024!

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In Closing

TFI International (TFII.TO) is a great foundational stock for any portfolio. You can be confident that, though volatile, a position in this stock will grow over time. Of course, when we say you can “forget” about a foundational stock for 10 years, we’re exaggerating. It’s still best practice to monitor all your holdings quarterly, including TFII. With foundational stocks, however, I don’t spend much time or dig too deep into the quarterly results unless I see signs of trouble, which I rarely do.

High-Risk High-Reward Stock for June 2024: Allied Properties REIT (AP.UN.TO)

On my buy list since April 2023, Allied Properties REIT (AP.UN.TO) has moved to the top on that list for Canadian stock paying a yield of 4% or more. Allied Properties is still not getting a lot of love from the market due to the negative sentiment around the real estate sector, and even worse for office properties. We continue to believe that AP is a very interesting play. Its stock price decline makes it a good entry point for investors interested in a speculative real estate stock. This is a falling knife—high risk, high reward—so proceed with caution.

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Allied Properties Business Model

Allied Properties is a Canada-based open-end real estate investment trust (REIT). It owns and operates unique urban workspaces in Canada’s cities and network-dense urban data centers in Toronto.

It provides knowledge-based organizations with distinctive urban environments for creativity and connectivity. Allied Properties operates in seven urban markets in Canada: Montreal, Ottawa, Toronto, Kitchener, Calgary, Edmonton, and Vancouver.

Allied engages in third-party property management business, providing services for properties, in which a trustee of Allied Properties has an ownership interest.

AP.UN.TO Investment Thesis

Allied features one of the strongest balance sheets among Canadian REITs. It has much of its capital invested in low-cost projects and is currently paying down higher-interest debt while simultaneously investing in new projects.

AP.UN.TO maintains its unique expertise in managing and developing prime heritage locations, which will continue to be in high demand in the coming years. The REIT also counts on many technology clients, which represent a growing sector in Canada.

There are still concerns surrounding office REITs, but Allied Properties has proven its resilience in difficult times. The 2023 distribution increase (+2.7% in early 2023) and low payout ratio for a REIT were good signs.

AP remains a high-risk, high-reward play; investors must do their due diligence and monitor the occupancy rate and FFO per unit growth.

AP.UN.TO Last Quarter and Recent Activities

Allied Properties did well in its most recent quarter, all things considered, with revenue up 4%, and Adjusted Funds from Operations (AFFO) per unit up 1%. The AFFO payout ratio for the quarter stands at 83.8%. Same Asset NOI (net operating income) from Allied Properties’ rental portfolio was down 2% while Same Asset NOI from its total portfolio was up 2.9%, reflecting the productivity of its upgrade and development portfolio.

AP.UN.TO’s occupied and leased area at the end of the quarter was 85.9% and 87%, respectively. This was lower than the previous quarter. We wish we would see this number go above 90%. Allied Properties remains a speculative play. Below is Allied Properties’ dividend triangle showing the falling stock price but revenue going back up. As always with REITs, look to FFO or AFFO per unit rather than EPS.

Potential Risks for AP.UN.TO

Most of Allied Properties’ income is derived from office properties. We know how the pandemic left a dent in the real estate market, especially for office space. Some workers were eager to return to the office, while others weren’t willing to. Many enjoy working from home and the way we work may be forever changed. There will be demand for quality office buildings, but how we will use offices in the coming years remains uncertain, and parking revenues might be weaker going forward.

AP.UN.TO’s properties are mostly located in Ontario (Toronto) and Quebec (Montreal). This limited geographic diversification can leave it vulnerable to economic changes in these provinces. We saw in their latest quarterly update that both regions had been affected. Fortunately, smaller markets such as Calgary and Vancouver showed strong occupancy rates. The global occupancy rate is at 87% for Q1 2024. We advise to not to enter a position unless you are willing to take the risk.

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Allied Properties Dividend Growth Perspective

When evaluating a REIT, we look for dividend increases that at least match inflation. This is the case with AP.UN.TO. The company has a 2.5% dividend CAGR over the past 5 years and healthy FFO and AFFO growth. An investor can therefore expect 2-3% annual dividend growth going forward.

For the full year 2022, AP.UN.TO’s AFFO payout ratio was 81%. It increased its distribution by 2.7% in 2023 (after a 3% increase in 2022), for an annual distribution payment of $1.80/share. After paying its special distribution in December 2023, AP.UN.TO hasn’t increased its distribution increase yet in 2024 but still shows a healthy AFFO payout ratio of 80%. If AP.UN.TO’s distribution doesn’t increase by the end of 2024, it will lose its dividend safety score of 3 at Dividend Stocks Rock . Allied Properties pays a monthly distribution.

Final Thoughts on Allied Properties REIT

With still much uncertainty around office space use in the future and Applies Properties’ occupancy rate on a downtrend (87% in Q1 2024 vs. 87.3% in Q4 2023 vs 89.5% in 2022), this is a speculative play.

However, AP.UN.TO still has decent payout FFO and AFFO payout ratios (77.8% and 83.8% respectively), making its guidance sustainable. It boasts unique heritage properties in urban areas and clients in the growing technology sector. It also has a strategic objective to establish its urban rental-residential portfolio.

With its stock price at under $17, compared to $21 a year ago and $32 two years ago, and distribution increases matching inflation (though not yet in 2024), this falling knife could be an interesting real estate play. Again, potential high reward, but high risk!

Spotlight on Brookfield Asset Management (BAM.TO / BAM)

We aim to spotlight Brookfield Asset Management, the new kid in the Brookfield family of companies. In 2022, Brookfield separated its asset-light management business as BAM and renamed the parent company, which was called Brookfield Asset Management, to Brookfield Corporation (BN). Confused? You’re not alone. So, BAM is an asset-light alternative asset manager…what the heck is that and is it a worthy investment?

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Alternative assets and asset-light management

Alternative assets are non-traditional investment opportunities different from conventional asset classes like stocks, bonds, and cash. Examples include real estate, private equity, infrastructure, venture capital, commodities, etc. Such assets are not as liquid as conventional assets and require expert management. They can also take longer to generate returns; for example, it can take several years for venture capital invested in a new startup or capital put into new complex infrastructure projects to create high returns. They demand patience from investors.

An asset-light management business like BAM doesn’t have many physical assets. It develops strategies, manages, and leverages funds from institutional investors, such as pension plans, retail clients, and other investors. It invests these funds into varied assets, which can include physical assets like those operated by other Brookfield companies, such as Brookfield Renewables and Brookfield Infrastructure. BAM makes most of its money from fees charged on its total assets under management (AUM).

Learn about another Brookfield company, Brookfield Infrastructure.

About Brookfield Asset Management

BAM offers three product categories: long-term private funds, perpetual strategies, and liquid strategies. It operates through Brookfield Asset Management itself and its subsidiaries.

Brookfield Corporation (BN.TO / BN), the parent company of the Brookfield family, owns 75% of BAM.

Spinning off the asset-light management business into BAM enabled Brookfield to create a capital-light company with zero debt and lots of cash and financial assets to support growth. To be clear though, Brookfield’s debt didn’t disappear, but rather wasn’t transferred to the asset management business (BAM).

BAM investing narrative

BAM makes money by charging fees on AUM. Therefore, the more money it raises for investments, the more its earnings grow. Since supply and demand influence AUM, you can expect BAM to show cyclical growth as the market fluctuates.

Even though alternative assets require more time to produce returns on the market than equities, investors tend to be nervous during bear markets; this affects alternative asset managers. We saw how a bad market in 2022 combined with higher interest rates increased nervousness and impacted all asset managers, alternative or not.

BAM will likely grow its AUM at double-digit growth rates for many years. The urgent need to invest in infrastructure and renewable energy will attract lots of money to the largest alternative asset managers. BAM is among the largest ones with approximately $929B of assets under management (up 11.4% from a year ago). If BAM can increase its AUM during a bad market like what we’ve seen since 2022 (+15% between 2022 and 2023, and +11.4% from 2023 to 2024), imagine what will happen when the market goes back into bull mode!

Below is the evolution of BAM’s stock price since the spin off in late 2022, and of its revenue, EPS, and dividend. Eighteen months isn’t a trend yet, but BAM’s off to a good start.

As most of BAM’s clients are pension plans, sovereign funds, insurance companies, and the like (e.g., big guys with big wallets and a long-time horizon), BAM’s portfolio will generate a constant income stream. Since most of its earnings come from fees charged on the AUM (as opposed to performance fees on how well they do), BAM has built a sticky business.

Recently for BAM

In early May, Brookfield Asset Management reported a good Q1 2024. It showed strong growth of 15% in its fee revenue from its flagship, private credit, and insurance strategies over the past year, on the back of over 15% growth in related fee-bearing capital over the same period. BAM saw lower transaction fees and lower fees associated with its permanent capital vehicles. BAM raised $20B of capital during the quarter, compared with $37B in Q4 2023.

Potential Risks for Brookfield Asset Management

BAM’s growth depends on investors’ confidence in long-term projects. When panic arises, it becomes difficult for companies like BAM to increase their AUM.

Brookfield invests for a time horizon of decades, while investors tend to be hungry for short-term news. This distortion often translates into short-term fluctuations and stock price drops. Well-managed, BAM has the expertise to navigate crises. Investors must simply be patient. The Brookfield family of companies is complex, which makes some investors wonder how money is managed within the business, including in BAM.

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BAM.TO / BAM Dividend Growth Perspective

The management team in place has an enviable reputation for generating growth for investors. This is also true when it comes to dividend payments. BAM earns base management fees from private funds, which are mostly contracted and predictable. As an asset-light alternative manager, BAM distributes more of its earnings to shareholders than its parent company, Brookfield Corporation (BN).

Following the spin-off, BAM’s initial dividend of $0.32USD/share paid quarterly increased to $0.38USD/share, a generous 19% hike!

Lastly

The new BAM is a pure play on alternative asset management. Interest in alternative assets is increasing, especially for institutional investors. It’s still early days, with only 18 months of results since becoming a pure asset-light manager. However, backed by the Brookfield family of companies and enjoying a lot of expertise, this large asset manager might be a very good play for patient investors. Also, with a dividend yield of 3.8, it fits well in many investors’ portfolios.

Buy List Stock for April 2024: Hammond Power Solutions (HPS.A.TO)

New to my buy list for April 2024 is Hammond Power Solutions (HPS.A.TO). This pick is a speculative play. While Hammond Power is a small-cap company it might be the underdog investors didn’t see coming. It’s an interesting play with a good dividend if one is not afraid of market fluctuations. Hammond is still experiencing significant growth.

See also our U.S. buy list stock pick for this month.

Get great stock ideas from our Rock Stars list.

Hammond Power Solutions Business Model

Hammond Power Solutions Inc. is a manufacturer of dry-type transformers in North America. It engineers and manufactures a range of standard and custom transformers that are exported in electrical equipment and systems. It enables electrification through its range of dry-type transformers, power quality products, and related magnetics. Its standard and custom-designed products are essential and ubiquitous in electrical distribution networks through a range of end-user applications.

The company’s products include power transformers, furnace transformers, converter transformers, unitized substations, control & automation products, low voltage distribution products, medium voltage distribution products, and others. It supports industries, such as oil and gas, mining, steel, waste and water treatment, commercial construction, data centers, and wind power generation. It has manufacturing plants in Canada, the United States, Mexico, and India and sells its products around the globe.

HPS.A.TO Investment Thesis

Hammond Power is a small-cap company with a market cap of approximately $950M that competes against many giants in the industrial field. The company enjoys a solid reputation for the quality and reliability of its. HPS tried to expand its success internationally but had to close its Italian division and continues to struggle in India. However, after closing its Italian business, the company focused on what’s working for it in North America.

The company is now well-positioned in Mexico and exhibits growth potential in both Mexico and the U.S., which now represent more than 50% of its total revenue. Hammond continues to witness significant growth in its custom business in the energy, mining, silica chip manufacturing, and data center markets.

HPS.A.TO Last Quarter and Recent Activities

Hammond Power Solutions 2023 results showed robust growth across all geographies and channels. Its most recent quarterly results were strong, again, with revenue up 30% and EPS up 10%. The quarter ended with record shipments of $187M globally. This was a new record top line, which helped the company reach its margin and profit targets.

U.S. and Mexico sales were helped by a stronger U.S. dollar relative to the Canadian dollar compared to 2022. HPS saw substantial sales growth in the OEM channel in the U.S. in support of data centers, warehousing, industrial manufacturing, mining, electric vehicle charging, renewable energy, and oil and gas production. The company will continue to invest in increasing its capacity for 2025. This is looking good!

Graphs showing Hammond Power Solutions (HPS.A.TO)'s stock price, revenue, EPS, and dividend over 10 years — Monster growth for Hammond Power Solutions (HPS.A.TO)

Potential Risks for Hammond Power Solutions

The pandemic had an impact on HPS as revenues decreased due to the deferment of electrical projects, business interruptions, and overall lower levels of economic activity. However, HPS proved its resilient business model, with orders rebounding and HPS skyrocketing.

We advise you to tread carefully with small caps that are growing too quickly. HPS’ expansion success in North America couldn’t be replicated in India or Italy. After closing its business in Italy, future expansion projects may not spark investors’ enthusiasm. Also, a part of the company’s revenue is tied to the oil & gas and mining industries, both of which are highly cyclical. HPS is also subject to currency fluctuations due to its exposure to the U.S. and Mexican markets. With such a small capitalization, an investment in this company can fluctuate frequently.

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HPS.A.TO Dividend Growth Perspective

HPS finally resumed its dividend growth policy in 2022 with a generous increase. The dividend went from $0.085/share to $0.10/share (+17.6% increase!) and then to $0.125 (+25%!) in early 2023. However, remember that the company chose to cut its distribution following the financial crisis of 2009, with more cuts in 2011-2012. The dividend remained stable for several years before the recent increases.

Unfortunately, the dividend growth policy will follow industrial economic cycles. In the meantime, you can enjoy the ride! Speaking of which, management increased HPS’s dividend by another 20% in September 2023.

Final Thoughts on Hammond Power Solutions (HPS.A.TO)

Hammond Power Solutions has shown amazing growth for the last two years. With a recession possibly around the corner, its customers in cyclical industries might not do very well themselves. Is HPS resilient enough to keep that growth going or will headwinds slow it down? Only time will tell.

Obviously, you don’t bet the house on this, but it could be a very lucrative investment, as long as you can live with significant volatility.

Buy List Stock for March 2024: Capital Power Corp. (CPX.TO)

Our buy list stock for March 2024 is Capital Power Corp. (CPX.TO). This is an educated guess. The company is almost perfect, showing a strong business model and good metrics. However, it might come with price fluctuations because of the risks surrounding debt for such a capital-intensive business in the current landscape of high interest rates.

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Capital Power Business Model

Capital Power Corp. is a growth-oriented power producer company. It develops, acquires, owns, and runs renewable and thermal power generation facilities and manages its related electricity and natural gas portfolios. It runs electrical generation facilities in Canada and the United States. The Company has approximately 9,300 megawatts (MW) of power generation capacity at 32 facilities across North America.

Its projects under construction include over 140 MW of renewable generation capacity and 512 MW of incremental natural gas combined cycle capacity from the repowering of Genesee 1 and 2 in Alberta. It has over 350 MW of natural gas and battery energy storage systems in Ontario and approximately 70 MW of solar capacity in North Carolina in advanced development. Its La Paloma facility is in Kern County, California. The Company also has a natural gas generation facility in the Harquahala region of Arizona.

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CPX.TO Investment Thesis

Capital Power has invested heavily in new projects each year since 2012. This has enabled it to grow its AFFO consistently. Contrary to Algonquin Power (AQN), CPX currently shows funds from operation per share growth year after year despite higher interest rates.

After announcing the acquisition of Midland Cogeneration (a 1,633 MW natural gas combined-cycle cogen facility), it did it again in late 2023, acquiring a 50.15% interest in the 265 megawatts (MW) Frederickson 1 Generating Station in Pierce County, Washington. This will bring CPX’s revenue diversification to 50% U.S. and 50% Canada.

The acquisitions add another 1,608 MW of net capacity to CPX’s U.S. WECC portfolio, boosting run-rate U.S. EBITDA to ~40% of total contributions. Acquisitions are expected to bring an 8% AFFO growth per share. CPX is now the 5th largest natural gas IPP in North America.

We like CPX’s strategy of investing in renewable energy and its goal to abandon coal in 2024 and show zero net production by 2045, but profitability might be hard to achieve with these projects in this market. 22% of adjusted EBITDA was generated from renewable assets in 2021. An investor can expect continued profitability going forward as CPX keeps investing in renewables.

Graphs showing Capital Power Corp.'s stock price, revenue, EPS, and dividend payments over 10 years. Sollid growth — CPX.TO: accelerating revenue and earnings growth, steady dividend growth

CPX.TO Last Quarter and Recent Activities

In 2023, Capital Power continued to transform its Genesee generating station to move away from coal. It completed the work needed for Unit 3, now 100% natural gas-fuelled, and progressed the repowering of Units 1 and 2, with completion expected in 2024. CPX made its largest transaction ever with the acquisition of the La Paloma and Harquahala natural gas facilities, as well as the addition of the Frederickson 1 facility.

Capital Power reported a good quarter with revenue growth of 6% and funds from operation per share up 15%. AFFO increased due to lower overall sustaining capital expenditures resulting from fewer outage activities, and higher adjusted EBITDA.

Potential Risks for Capital Power Corp.

For several years, Capital Power’s had too much of its revenue coming from Alberta making it dependent on the state of the province’s economy. Through its multiple acquisitions, CPX brought its exposure to this province down to 31%.

As with all other utilities, CPX.TO is a capital-intensive business. It must invest heavily continually to generate more cash flow. The market might not be so eager to see additional debt to fund projects in the coming years. With higher interest rates, debt could become a burden. There’s no guarantee that liquidity will continue to be easy to get from capital markets. While CPX shows a healthier balance sheet than Algonquin, let’s not forget how aggressive growth by acquisition strategies can end when they’re not managed properly. Finally, weather variation could affect results as we’ve seen already, where warm winters reduce AFFO occasionally.

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CPX.TO Dividend Growth Perspective

Considering its various wind energy projects and the robust Alberta economy, CPX’s management expects to increase its dividend by 6% through 2025. Such a promise is always welcomed by income-seeking investors. Through its successful transformation into a diversified utility, CPX is earning its place among other robust Canadian utilities such as Fortis, Emera, and the Brookfield family.

Final Thoughts on Capital Power (CPX.TO)

CPX.TO intends to invest heavily in the wind energy business and to get many U.S. projects. Its diversification plan is paying off; it reduced Alberta’s contribution to its revenue to less than one-third and has managed to show sustained growth. The company now expects a dividend growth rate of 6% through 2025.

With its vigorous growth by acquisition strategy, Capital Power could face headwinds from high interest rates on significant debt. Investors aware of these potential risks and willing to live with them while the investment thesis stands might find it an attractive play.