I have substantial holdings in both Telus Corp. (T-T) and Northland Power Inc. (NPI-T) that, unfortunately, I hold in registered accounts, so I can’t use the capital loss. It goes without saying that I’m extremely disillusioned with the present status of both companies. My gut feeling is to lick my wounds and move on, but I’m also considering rolling the dice with just one of them. My reasoning is that Northland has more upside than Telus at this point since most of the bad news is already baked into the share price. My plan is to sell Telus then buy Northland with the funds. Can you offer your thoughts on my situation?
I understand your frustration – both stocks have been major disappointments this year. But here’s the key question your plan raises: If you already have substantial holdings in both Telus and Northland Power, what is the benefit of increasing your exposure to either one? Concentrating your portfolio will magnify your gains if the stock rebounds, but it will also increase the downside if things don’t go as you hope.
You also describe yourself as “extremely disillusioned,” which suggests emotions – specifically regret over losses – may be influencing your thinking. Perhaps part of you hopes that by dumping Telus and going big on Northland Power, you might recoup what you’ve lost. You even used the phrase “rolling the dice,” which is telling: It sounds like a gambler chasing losses at a casino.
In behavioural finance, this is a classic example of loss aversion. It takes many forms: refusing to sell until you “break even,” selling winners too quickly to “lock in” gains or – as in your case – taking on extra risk to recover past losses rather than sticking to a balanced strategy. The problem is that these decisions aren’t guided by fundamentals or diversification, but by emotion.
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Your decisions about Telus and Northland Power should really be made independently, based on each company’s prospects today. There is no inherent reason to link the sale of one to the purchase of the other, especially when Northland already makes up a large position in your portfolio.
With that mind, let’s look at each company on its own merits.
Shares of Northland Power plunged in mid-November after the renewable power producer slashed its dividend by 40 per cent, catching many investors by surprise. The company plans to redirect the cash it saves toward major offshore wind developments, including the Baltic Power project in Poland and the Hai Long project in Taiwan. With the stock down about 30 per cent since the dividend cut, the shares now yield about 4.2 per cent.
Analysts say reducing the dividend was the right call, given the company’s high payout ratio and large capital needs, and that it puts the company on a firmer financial footing.
“We see good value in NPI and believe the share price reflects a deep discount to the value of the existing assets and projects under construction,” Nelson Ng, an analyst with RBC Dominion Securities, said in a Nov. 26 note following meetings with Northland Power management.
Mr. Ng pointed out that the company’s assets – which include onshore and offshore wind, solar, natural gas and battery storage – are highly contracted or regulated, supporting predictable cash flows. He also noted that, according to management, the company was not under pressure from credit-rating agencies to cut the dividend and is “well within the leverage metrics” of its investment-grade rating.
Still, not every analyst is so bullish. Skeptics note that offshore wind developments are capital-intensive and vulnerable to cost inflation and other risks. Of the nine analysts surveyed by Zacks, there are five buy ratings – including Mr. Ng’s – and four holds, with an average price target of $22.55. Northland Power closed Friday at $17.24 on the Toronto Stock Exchange.
If you believe Northland Power is undervalued and that the “bad news is already baked in,” then by all means hold on to your shares. But doubling down will only increase your risk. If the stock rebounds, great. But if the company delivers any more unpleasant surprises, you’ll feel even more pain.
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As for Telus, the stock has also dropped to a level where some analysts see attractive value. The 20-per-cent tumble over the past three months was driven, in part, by investor concerns about the company’s debt load and the sustainability of its dividend. With the stock already yielding more than 9 per cent, investors were uneasy over the company’s plans to keep raising the payout.
Telus addressed such concerns in early December, announcing that it will pause dividend growth until its share price and dividend yield reflect its “considerable growth prospects.” It also detailed plans to increase its free cash flow by about 10 per cent annually from 2026 through 2028 and deleverage its balance sheet.
Jerome Dubreuil, an analyst with Desjardins Capital Markets, called the dividend pause prudent but warned that the gross dividend payout ratio – before accounting for the dividend reinvestment plan – won’t drop below 100 per cent until 2028.
“This high payout limits management’s flexibility,” Mr. Dubreuil said, but added: “We don’t anticipate a dividend cut at Telus if the company executes on its [free cash flow] plan.”
Mr. Dubreuil is one of eight analysts with a buy recommendation on the shares. There are five holds and one sell, and the average price target is $22.68, according to Zacks. Telus closed Friday at $17.63 on the Toronto Stock Exchange.
As you are considering whether to sell or hold your Telus and Northland Power shares, try not to let emotions drive your decisions. As much as your paper losses may be top of mind, they’re not actually relevant to what you should do next. What matters is how you expect the stocks to perform from here.
A useful exercise is to ask yourself: If you didn’t already own Telus or Northland Power, would you consider the recent selloff a buying opportunity? If the answer is yes, then holding may be appropriate. If the answer is no, then it may be time to move on from one or both companies.
Whatever you do, make it a forward-looking decision – not an exercise in repairing the past.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.