TA, TransAlta Corp.

ta jul 2012 lta jul 2012 s

TransAlta Corp is a utility, the largest publically owned in Canada. It operates here but also in the US. It does a little bit of every thing, coal, wind , oil, hydro, solar and geothermal. It has been around for more than 100 years. Sustainability is a primary concern. 3 days ago they announced their dividend for the most recent quarter, $0.29. or $1.16 a year (without compounding). With a share price of about $17.50 this works out to 6.3% (when properly compounded about 6.5%). The /e is around 22, a little high.

The stock is doing a large A-B-C down from the $38 high. It has already dropped 58%. 62% would take it to $14.50. It has already dropped to the level of the 4th of previous degree even if the range for that extends to about $13.50. The C-leg is small relative to the A-leg and certainly appears to be missing its 5th wave, which could take the stock to about $ 15 if 1 and 5 were to become equal. If the C leg grew to 62% of the A leg the low would occur at about $12. Just a few weeks ago, it was trading at the same level it was trading at 18 years ago!To make a long story short, in the worst case the stock could fall another 30%(but would presumable rebound within a short period of time, say 2 years at the most). lets assume your time horizon is somewhere between 5 to 10 years. Your risk-free return would equate to the yield of Government of Canada Bond with that maturity, shown below;

Gov of Can bonds jul 2012

The actual 10 year is at 1.6%. If you were to own the stock in a taxable account you would be able to gross-up the 6.5% yield by 1.4(assuming you are enjoying the highest marginal tax rate) to 9.1%, for a difference of 9.1 – 1.5 = 7.6%. This could be considered the risk premium that you are willing to forego financing Ottawa. For non–taxable accounts the difference is still a respectable 5%. At that rate money doubles in 14.4 years so a brief paper loss for perhaps a year or two of 30% is not that relevant.

Then there is ZUT, the BMO equal-weight utility index. It is fairly new. Here are the charts;

ZUT jul 2012Zut components.

Notice that the ZUT kept going up while the market in general was going down. Over the past two years or so it is up about 30%. It resembles the inverse of the bonds. TransAlta has gone down about 20% over the same period. It is a component of the ZUT so its relative performance is a little worse than those numbers suggest. Barring any fundamental reasons that I am not aware of, this should be a buy.