Revenge Of The Utilities: Northland Power (NPI.TO)

By The Insider

@BantingInc

/ 8:53 pm
January 6, 2024

Utilities appear to be back in fashion as expectations for interest rate cuts keep moving up the calendar in 2024. As a matter of fact, 1 Canadian utility company seems poised to capitalize on rate cuts throughout the year, Northland Power (NPI.TO).

Northland’s Dividend Advantage

Approximately 6 weeks ago market market participants caught wind of Northland Power, since that time Northland’s stock has soared 8.5%. Like all utility companies, Northland Power’s stock price is extremely sensitive to changes in interest rates. However, Northland has the advantage of having an above average dividend of 4.98% that is paid out monthly.

Northland will likely be one of the first utility companies who’s dividend rate (4.98%) exceeds prevailing interest rates after the first or second rate cut in 2024 (should those occur). Coupled with the monthly distribution, which is not very common in the market today, Northland should be a place where investors go to seek higher than market interest rates in a solid utility company. To put it simply, as prevailing market rates fall, Northland’s dividend rate will become more attractive to market participants looking for yields.

The Financials

To go further, Northland is a lot more than just an above average, monthly, dividend payer. The company has a diversified portfolio of assets in multiple countries around the world, these include offshore and onshore wind, efficient natural gas, and solar generating assets. The company is able to generate renewable electricity and sell that electricity to distributors in various regions.

Northland has a p/e ratio of 15.4 which is below the industry average of 17.1 and the company has a quick ratio of 0.91. We expect the quick ratio to improve to above 1 over the next one or two quarters which should put the company in a better position to pay its short-term liabilities. Q3 2023 was already a step in the right direction as free cash flow and net income took a big step forward following an abysmal Q2.

Looking Forward

As interest rates come down, Northland’s free cash flow should also get a boost from the lowered cost of servicing the debt on the company’s balance sheet. In addition, the solid pipeline of projects the company is developing around the world could add fuel to future capital gains if interest rates decline in both 2024 and 2025. Northland Power could be the big dividend payer with bonus capital gains if everything goes according to plan.