Transalta Corp (TA.TO)

(Market Call Minute.) This company has had trouble for a long time. The fact that they own a lot of coal assets, and a government committed to the latest environmental standards, that is not a good combo.

2019 bonds for a small portion of a portfolio? This company has kind of fallen on hard times. They are holding about 7X leverage, which is high. Thinks the bonds trade at around 7% which is not overly cheap. If you do this, it will require more diligence.

There has been concern that this may be a value trap. It is cheap enough. Price momentum has turned in the coal power generation business, but are transitioning to a renewable model. Thinks the recent dividend cut gives them the flexibility to do that. What is interesting is that you have optionality. Brookfield recently filed that they own just under 5%. They have asked the SEC to hold off on reporting for 6 months. You only do that if you are planning on buying more, or if you are in talks with the company. Dividend yield of 2.69%.

Has never owned this. It has gone up very sharply recently, and apparently has to do with some of its renewable energy assets, which seems to be in the sights of Brookfield and another player. There is a suggestion that the renewable part will be taken out at great profit to the shareholders. If you own, you should probably Hold.

In the doghouse because it deserves to be in the doghouse. This is a utility. Basically investors buy utility stocks because they are safe and dividends are safe. The dividends usually grow. This one has not been safe. The dividend has not only not been growing, it has been slashed. The company is not that well run.

6.4% bond maturing Nov 18/19 at $96. The yield to maturity is 7.63%, which is still an investment grade bond. It was rated as a BBB minus, but Moody’s downgraded it to one notch below investment grade late last year, and their bonds have fallen by about 15 points. They have 2 bonds maturing between now and 2019. Their forecasts are for about $1 billion in EBITDA in the next 2 years.

Wouldn’t be a buyer here as there is too much uncertainty. There is slowing demand from a weak economy in Alberta, and then you have uncertainty regarding climate policy and how that will impact the company. An alternative might be Transalta Renewables (RNW-T).

A big concern is their coal fired assets. They also have some Hydro and some wind, but coal is a significant amount of their assets, both in Canada and in Washington state. There isn’t clear detail on how the Alberta government will help the coal producers transition. Even though the stock has fallen a lot, he still has concerns about power prices in Alberta.

Has had a ton of downside pressure. It trades at a significant discount to its net asset value. The yield support is there. It is a well run set of assets and he thinks you can keep it.

Has been a problem child for a long time. They executed very poorly on their assets. They are over levered. Moody downgraded their debt. It all stems from the government’s climate change policy. The coal assets are about 40% and they had to take a write down. The dividend is susceptible to cutting because they have to get their debt down. You are in a headwind because coal assets will be forced to go offline.

This and its sister company Canadian Utilities (CU-T), have been hit for a variety of reasons, Alberta being the biggest. Everybody hates this one. A massive yield of 15%. He uses 5% as a sign as to when the flags go up. 6% means being very, very careful. Anything over 6% needs investigation. One of the issues they have are balance sheet questions. How can they continue to expand, how can they meet demands for working capital? The dividend is an easy thing to sacrifice in the near term. They have pushed much of their assets into Transalta Renewables (RNW-T). Analysts are saying that the value of Transalta Renewables is now equal to the price of Transalta, plus you get all the coal assets, plus you get some Hydro assets. If you can get around the dividend getting cut, the asset play looks quite interesting.

Dividend is not sustainable. You buy utilities for the safety of the stock and the safety of the dividend. This company has none of that. Any stock that yields 15%, the market is telling you that the dividend is not stable. A very troubled company.

Stock has a pretty defined downtrend. As a technical person he would say you don’t own a stock that looks like this. Expects there will be a rally into the first week or two of January, and would use that as a sell opportunity.

Wonders why you would want to get into this. If looking at a utility, you are looking for a safe, secure distribution over time. There are a lot of questions around this one because they haven’t executed very well along with the whole carbon capture scenario. About 65% of their power is generated from coal. Not something he would be stepping into.

This just continues to hit new lows, seemingly every month. It is a stone throw away from what he terms as “going into the blue”, and he recommends that people not play with companies like this. The 17% dividend is suspect. They are not even close to earning their dividend.