Back to top

Growth & Income

TransAlta Corporation (TAC - Snapshot Report) is a great choice for investors looking for both growth and income. Analysts project the company will grow earnings per share by 17% in 2011 and 12% in 2012, and the stock yields a juicy 5.7%.

The company recently reported a solid fourth quarter in which EPS beat the Zacks Consensus Estimate by 8%. This prompted analysts to revise their estimates higher, sending the stock to a Zacks #2 Rank (Buy).

Company Description

TransAlta Corporation is a wholesale power generator and marketer with operations in Canada, the United States, and Australia. It owns and operates hydro, wind, geothermal, biomass, natural gas- and coal-fired facilities, and related mining operations.

The company also has an energy trading arm that trades energy-related commodities and derivatives. TransAlta is headquartered in Calgary, Alberta, Canada and has a market cap of $4.5 billion.

Outlook

Management expects modest EPS growth in 2011. It expects natural gas prices to remain low until 2012, which will keep power prices at 2010 levels.

Nonetheless, analysts raised their estimates following a solid fourth quarter. The Zacks Consensus Estimate for 2011 is $1.12, representing 17% growth over 2010 EPS. The 2012 estimate is 12% higher at $1.26.

It is a Zacks #2 Rank (Buy) stock.

Dividend

TransAlta has a solid balance sheet and produces strong cash flows. In the fourth quarter of 2010, for instance, the company generated $309 million in cash flow from operations, a 25.6% increase over the same quarter in 2009.

The company has been using its strong cash flow to steadily raise its dividend. It currently yields an attractive 5.7%.

TransAlta's payout ratio of 120% is well ahead of its target payout ratio of 60%-70%, however, so don't expect the company to significantly raise its dividend anytime soon.

Fourth Quarter Results

Earnings per share for the fourth quarter of 2010 came in at 39 cents, beating the Zacks Consensus Estimate by 3 cents.

Total revenue was up 6.3% while the gross margin expanded from 57.0% to 59.2% of sales in the quarter. This led to a 32.1% jump in operating income.

Also in the quarter, TransAlta began commercial operations of its 69 megawatt (MW), $135 million Ardenville Wind farm and its 54 MW, $100 million expansion of the Kent Hills wind farm. This will help boost EPS in 2011 and beyond.

Valuation

Shares are trading at 18.1x forward earnings, a premium to the industry average at 14.1x. Its price to book ratio of 1.4 is in-line with its peers, however.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

Please login to Zacks.com or register to post a comment.