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Altagas Ltd. (TSX:ALA) has been in a house of pain for over two years now. The stock is currently off a whopping 41.2% from its high in 2014 and now offers a huge 6.8% dividend yield. The company recently announced the acquisition of WGL Holdings Inc. (NYSE:WGL) which will triple Altagas’s customers in the utility segment and increase its gross capacity to 1,900 MW in its power division.
Does the stock offer deep value for investors?
WGL Holdings is a utility holding company with a diversified portfolio of energy-infrastructure assets. Such assets consist of gas utilities, gas pipelines, and clean power. The management team at Altagas expects WGL Holdings to grow EPS by a whopping 8-10% through 2021. In the short term, the acquisition is expected to boost earnings by 7-9% for the full first year.
The company has enjoyed an 8% compound annual growth rate (CAGR) for its dividend per share over the last seven years. Going forward, the CAGR is expected to be as high as 10% for the next four years thanks to the EPS boost that the WGL Holdings acquisition is expected provide.
What about valuation?
The stock currently trades at a forward price-to-earnings multiple of 25.8 with a 1.4 price-to-book multiple, both of which are significantly lower than the company’s five-year historical average multiples of 58.6 and 2.1, respectively. The company is dirt cheap, and an investment in the stock at current levels could offer a huge upside over the course of a few years.
Is the dividend safe?
With a dividend yield almost at the 7% mark, there should definitely be some alarm bells ringing for long-term income investors. Looking back on the company’s dividend history, there have been multiple cuts made in a few years following the Great Recession. The current payout ratio is a ridiculous 571.4%, which is unsustainable.
While I believe the latest acquisition will help lower this payout ratio in the long run, I don’t see any other factors that will lower the ratio in the short term, so it’s quite possible that another dividend cut could be on the horizon.
Conclusion
After the acquisition, Altagas has over $22 billion worth of assets. I believe the company is on the right track, and the stock price dip that followed the news of the acquisition is unwarranted.
The WGL Holdings acquisition is expected to close by the conclusion of Q2 2018 and will give Altagas a nice earnings boost that will lower the company’s high payout ratio.
Although the short-term outlook looks bleak, I believe the company is well positioned to rebound from its decline over the next few years. This rebound will definitely not happen overnight, so short-term thinkers should probably take caution with this name as there could be more downside this year.
If you’re a long-term investor with a time horizon of five years or more, then pick up shares of Altagas and collect the fat 6.8% dividend yield while you wait for the company to slowly rebound. Just don’t be surprised if the dividend gets cut this year because the company will inevitably increase it once it is firing on all cylinders again.
