Dividend Stocks

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.

CNR and CNQ – Beat the Competition on Cost

CNR and CNQ are two companies that hold cost advantages over their competition. Canadian National Railway (CNR.TO) is a transportation and logistics company while Canadian Natural Resources (CNQ.TO) is in oil & gas exploration and production.

They have a cost advantage because they can produce goods or services at a cheaper price than their competitors. A cost advantage can be used in two ways:

1) Crush the competition with low price

Often, the easiest way to gain market share is to sell at a cheaper price than their competitors. When they produce the same goods or services at a lower cost, they can undercut competition. This is what Canadian National Railway (CNR.TO) does.

2) Sell at the same price, but make a lot more profit

When the business model permits, some companies will sell at the same price as their competitors. Their advantage is in the higher margin they enjoy thanks to their lower operations cost. They then become money-making machines. Canadian Natural Resources (CNQ.TO) often does this.

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Canadian National Railway – Offering lower prices

Railroads are known to be one of, if not the cheapest way to transport goods across land. With Canada and the U.S. amongst the largest countries in the world, CNR (and Canadian Pacific Kansas City CP.TO for that matter) are quite popular. Railroads are less flexible than truck transport, but they are surely the lowest-cost transport.

But CNR is more than railway transport! Its services also include intermodal, trucking, and supply chain services. CNR’s rail services offer equipment, customs brokerage services, transloading and distribution, private car storage, and more. Intermodal container services help shippers expand their door-to-door market reach with ~23 strategically placed intermodal terminals. These services include temperature-controlled cargo, port partnerships, logistics parks, moving grain in containers, custom brokerage, transloading and distribution, and others. Trucking services include door-to-door service, import and export dray, interline services, and specialized services.

CNR.TO dividend triangle as of May 2024 — CNR.TO dividend triangle: trend of stock price, revenue, earnings per share, and dividends over 10 years

Known as “best-in-class” for operating ratios for years, CNR boasts strong operational performance, with velocity and speed staying solid metrics quarter after quarter. CNR has tirelessly improved its margins and was among the first railroad companies to do so. Today, its peers have caught up and are managed in the same way.

CNR profits from cost advantages over trucking and other transportation methods, and from the scale of its operations which is virtually impossible to replicate. These advantages give it what is called a wide economic moat, meaning that it will enjoy these benefits for 20 years or more. Therefore, it can count on increasing cash flows each year.

The good thing about CNR is that investors can always wait for a down cycle in the economy to invest in it. You can bank on it going back on a roll when things pick up and consumers and businesses buy more goods.

Canadian Natural Resources – Raking in the profits

A play in the energy sector is Canadian Natural Resources, an oil and gas exploration and production company. CNQ enjoys long-life assets with low declines in its reserves. The company can produce oil and natural gas at an extremely low cost. This enables CNQ to ramp up production when prices are up and boost their margins. During down cycles, it can slow down production and still be highly profitable. In other words, its cost advantage makes CNQ a cash flow-making machine.

Canadian Natural Resources (CNQ.TO) dividend triangle: revenu, EPS, and dividend growth over 10 years — CNQ.TO dividend triangle: trend of stock price, revenue, earnings per share, and dividends over 10 years

CNQ sits on a large asset of non-exploited oilsands and its break-even price for the WTI grade of crude is $35. However, the fact that oilsands are not exactly environmentally friendly and that more and more countries look to produce greener energy and electric cars does cool our enthusiasm a bit.

Despite this, CNQ is very well positioned to surf any oil boom. It invested heavily, and it is now generating higher free cash flow because of that capital spending. CNQ appears at the top of my list for a long-term play in the oil & gas industry. I also appreciate CNQ’s shareholder-friendly approach, as it will return 100% of free cash flow to shareholders after hitting $10B in net debt.

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Cost-advantaged companies in other industries

There are companies in other industries that also enjoy cost advantages over the competition. Think of Costco which positions itself as the largest customer of its suppliers to gain negotiating power and offer the lowest prices to its customers.

Walmart is another great example of a cost-advantaged business. As a dominant retailer and among the largest grocers in the U.S., WMT built its entire business model around offering “low prices every day”. Walmart “squeezes” every penny from its suppliers to 1) offer the cheapest price possible to customers and 2) crush most competitors. You don’t go to Walmart for its exceptional customer service, but rather to pay as low a price as possible for everyday goods.

The cost advantage can be deadly. Amazon founder, Jeff Bezos, once said “Your margin is my opportunity”. Companies, such as Barnes & Noble, thought they were doing well, and that no competition could kill them. Along came Amazon with a different business model focused on building a strong cost advantage. Barnes & Noble survived, barely, but it’s not a flourishing business anymore.

Buy List Stock for May 2024: Telus (T.TO / TU)

A buy list stock of mine since March 2023, Telus is still in my top five Canadian picks for growth. As future growth in the wireless industry is limited, Telus has diversified its business to find new growth vectors. The company is acting wisely in the face of the current headwinds by reducing its capital expenditures (CAPEX) and increasing its cash from operations. It hasn’t received a lot of love from the market in the last two years, and likely won’t in 2024, but I believe that will change eventually; in the meantime, investors enjoy consistent mid-single-digit dividend increases every year.

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Telus Business Model

TELUS Corporation is a Canada-based telecommunications company. The Company provides a wide range of technology solutions, including mobile and fixed voice and data telecommunications services and products, healthcare software and technology solutions, and digitally led customer experiences.

Data services include internet protocol, television, hosting, managed information technology and cloud-based services, software, data management and data analytics-driven smart-food chain technologies, and home and business security. It operates through two segments.

The technology solutions segment includes network revenues and equipment sales arising from mobile technologies, data revenues, some healthcare software and technology solutions, voice, and other telecommunications services revenues.
The International segment is comprised of digital customer experience and digital-enablement transformation solutions, including artificial intelligence (AI) and content management solutions.

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Telus Investment Thesis

Telus has grown its revenues, earnings, and dividend payouts very consistently. Very strong in the wireless industry, the company is now tackling other growth vectors such as internet and television services. Telus has the best customer service in the wireless industry as shown by its low customer loss rate. It uses its core business to cross-sell its wireline services. The company is particularly strong in Western Canada. Telus is well-positioned to surf the 5G technology tailwind.

Finally, Telus looks to original and profitable ways to diversify its business. Telus Health, Telus Agriculture, and Telus International (tech & games, finance, eCommerce, and artificial intelligence) (TIXT.TO) are small, but emerging divisions that should lead to more growth going forward. In 2022, Telus acquired Lifeworks for $2.3B to boost its health business segment.

In 2023, CAPEX slowed down ($2.6B) and was mostly financed by free cash flow ($2B). This explains why the company keeps its generous dividend growth streak alive. For 2024, the company expects lower CAPEX and stronger operating cash flow. We like that mix!

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Telus Last Quarter and Recent Activities

Starting in 2023, the macroeconomic landscape has made it a challenging time for the telecommunications industry and Telus is no exception—years of fueling growth through cheap debt ended with rising interest rates.

Telus recently reported lackluster results for Q1’24. Consolidated revenue was down 0.6% and adjusted EPS was down 3.7% compared to Q1’23. Revenue for wireless/wireline revenue was up 0.4%, but down in for Telus Health (-0.7%), Agriculture (-0.24%), and International (-.98%).

Cash flow from operations of $950M increased 25% from Q1’23, but free cash flow was down 26% to $396M, due in part to interest charges going up to $394M from $320M.

Telus is keeping its CAPEX stable, a wise move during this difficult time. It reaffirmed its 2024 full-year guidance that it will have sufficient cash flow to pay dividends.

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Potential Risks for Telus

Competition is increasing among the Big 3 in the wireless market; Rogers and Shaw merged, and a new player is arriving on the scene, with Quebecor acquiring Freedom Mobile. Margins could be under pressure in the future. Also, the federal government wants more competition for the “Big 3” and is likely to open the door to new competitors down the road.

As the wireless market becomes fully mature, Telus will need other growth vectors. TV & internet won’t be enough to prevent Telus from becoming another Verizon (VZ) ten years from now. We’re not convinced by the acquisition of Lifeworks, specifically its cost. We will see how Telus integrates the business into its Health division.

Finally, Telus’ debt has increased substantially, from $12B in 2015 to $27B in 2024. Higher rates might affect future profitability, especially if they persist. Everyone expects tate cuts in 2024, but so far, the Bank of Canada keeps delaying them due to inflation. The headwinds facing the company explain its stock performance as of late.

Telus Dividend Growth Perspective

This Canadian Aristocrat is by far the industry’s best dividend payer. Telus has a high cash payout ratio as it puts more cash into investments and capital expenditures. Capital expenditures are regularly taking away significant amounts of cash due to their massive investment in broadband infrastructure and network enhancement.

Such investments are crucial in this business, and, for a good while, Telus filled the cash flow gap with financing. At the same time, Telus continued to increase its dividend twice a year, exhibiting strong confidence from management. In 2023, Telus increased its dividend twice for a total increase of 7% for the year.

However, with the higher cost of debt and other macroeconomic challenges, Telus has wisely reduced its capital expenditures. This decision has already helped increase its operating cash flow, contributing to the dividend’s safety. Investors can still expect the dividend to increase, but I suspect the dividend growth will slow down in 2025 while the company faces the current headwinds and because of its lower free cash flow.

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Final Thoughts on this Buy List Stock

The story for Telus in 2024 is about three important metrics: cash from operations, capital expenditure (CAPEX), and free cash flow. I want to see the first one go up, the second one go down, and the last one to cover the dividend payments. I have Telus in my portfolio. Over the next few quarters, I will keep an eye on these metrics.

Right now, Telus is struggling a bit and not performing as well as I’d like. I still see a lot of potential in its diversified business areas, Telus Health, Telus Agriculture, and Telus International. These should eventually generate growth for the company. For a patient investor who’s in it for the long haul, Telus could be a great opportunity and that’s why it’s a buy list stock of mine.

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.

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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.