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A TransAlta wind farmHO

At some point, you have to wonder if some concrete bad news from TransAlta Corp. will be better than all the uncertainty that is currently weighing on the share price. On Monday, the shares were down again – this time, touching their lowest level since November, 2004. The shares have fallen nearly 20 per cent this year alone and are down about 55 per cent from their high in 2008, when takeover speculation drove the shares to what now looks like an absurd-looking peak.

These days, the only speculation surrounding TransAlta relates to potential setbacks for the electricity generator. My colleague John Heinzl outlined some of these challenges in a recent article – highlighting the company's legal dispute with TransCanada Corp. over the closed Sundance generating station, its uncertain credit rating and a rising dividend yield that suggests investors are growing convinced that a dividend cut is coming.

With a dividend yield of 6.9 per cent, the stock is flashing a warning sign – and say what you want about market efficiency, but the market has an uncanny ability for forecasting dividend troubles. And these suspicions don't come from nowhere: TransAlta has failed to raise the dividend for more than three years, and has been paying out more in dividend payments than it has been bringing in in earnings.

Meanwhile, analysts are downbeat. Among the 12 analysts tracking the stock, just three of them recommend it as a "buy", according to Bloomberg. Five analysts recommend it as a "sell" and another four have "hold" recommendations on the stock. In the most recent update, Scotia Capital cut its target price on TransAlta to $16 from $18, reiterating a "sector underperform" recommendation.

In other words, there's nothing but bad news and dismal sentiment here. But at what point does TransAlta look tempting to investors? While markets don't like the threat of a dividend cut, an actual cut is another matter entirely. During the 2008 and 2009 financial crisis, markets often rewarded companies that cut their dividends – seeing it as a step toward financial responsibility. As well, while companies are loathe to cut their dividends in the first place, they are especially fearful of doing it twice, which gives a reduced dividend – oddly enough – some credibility.

There's always the model of TransCanada to look to. The pipeline company announced in December 1999 that it would cut its dividend by 29 per cent following a disastrous diversification strategy, sending the share price to a nine-year low and the yield to a high of 7.3 per cent – then the highest yielding stock on Canada's benchmark index. Since the announcement, though, the share price has risen a total of 235 per cent after factoring in dividends – which are now rising at a yearly clip – or about five-times the pace of the S&P/TSX composite index.

If bad news worked for TransCanada, maybe TransAlta should take note.

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