As the possibility of the interest rate cycle turning comes into clearer relief, utilities, which have been underperforming in a rising rate environment, should switch back on and begin to outpace their non-dividend paying rivals. And a utility that both pays a dividend AND is growing earnings, would be a great play at this point in the rate cycle. TransAlta (TAC – Get Rating) is managing to do both, and is my Under $10 stock this week. 

TransAlta  is a Canadian based electric utility company that generates power via wind, hydro, gas, and coal. The company has been in business for over 100 years, and is one of the largest renewables energy companies in North America. The company is a huge wind power producer in Canada, and is the largest hydro power producer in Alberta.

In its latest earnings release the company increased year-to-date earnings by 18% over 2022, and increased free cash flow (FCF) 19% over the same period. TransAlta currently trades at just 5.2x earnings, and only 0.96x sales. The company is valued at just 2.7x its cash holdings. 

The stock has a positive reaction to earnings, but still is trading 25% below its consensus target price. The stock is in the bottom end of a range it has been in since late 2022, from just under $8 to just over $10. The company announced an acquisition in the recent quarter of Heartland Generation, an Alberta and British Columbia power company, as well as the commissioning of several new solar and wind projects. These new operations, combined with falling rates, could boost the stock back to the $10 level. 

TAC is an A rated stock in our POWR Ratings, with high marks in a combination of components that includes Value, Sentiment and Quality. 

All of the large energy players have been increasing renewables investments, and TransAlta is a leader in this increasingly important area of the energy market. The company has a ton of upside potential with its growing renewables portfolio, and has shown the ability to grow yet keep a steady eye on investment risk. 

This combination of growth, and the fact that TAC also pays a 1.9% dividend, makes TransAlta a definite portfolio candidate as rates soften and we face the possibility of rate cuts in the not too distant future.

What To Do Next?

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