I winced when I heard an investor say that Altagas Ltd. (TSX:ALA) seemed like a good buy because the stock was trading north of $50 per share in 2014 and is now trading below $30 per share.
Investors should never compare the stock price of a company to where it traded before to see if it’s a good value or not. After all, businesses change over time.
For example, Altagas’s earnings before interest, taxes, depreciation, and amortization (EBITDA) commodity exposure is reduced from 50% to 6% since 2010.
Growing dividends
Altagas changed from being an income trust to being a dividend-paying corporation in July 2010. At an annualized basis, you’ll see that the company “cut” its dividend per share in 2010 and 2011.
But on a monthly basis, since the conversion to a corporation, the company has been increasing its monthly dividend over time.
Specifically, since July 2010, Altagas has increased its dividend per share at a compound annual growth rate of ~6.8%. And its dividend per share is ~6% higher than it was a year ago.
Its payout ratio for this year is estimated to be ~88.3% of cash flow. Moreover, ~90% of the dividend is supported by contracted cash flows.
Notably, Altagas plans to start selling non-core assets of $1.5-2.5 billion in Q3 2017 as it makes progress on regulatory approvals for the WGL Holdings acquisition.
Altagas aims to increase its dividend per share by 8-10% through 2021.
Stable cash flow
The company is confident about its dividend because of its stable cash flow generation. It generates ~85% of contracted cash flow, including from rate-regulated utilities, long-term power-purchase agreements (PPA), take-or-pay (~17 years on average) and cost of service agreements (~13 years on average).
Altagas’s PPA with Hydro BC is 60 years. The hydropower capacity for these assets makes up ~16% of its power portfolio.
Growth
Altagas has multiple growth catalysts. For example, its $8.4 billion pending acquisition of U.S.-based WGL will add largely regulated gas utilities to its portfolio.
Additionally, Altagas is building infrastructure assets to serve new markets. It’s expected to build the first propane export terminal on Canada’s west coast, which will allow gas producers to access Asian markets.
Investor takeaway
The company is going through a major transformation with the WGL acquisition expected to close by mid-2018, which is some way off. The uncertainty has added pressure on the stock.
Despite the recent weakness, Altagas shares have still managed to deliver annualized returns of ~12% since July 2010. The consensus target on the stock 12 months from now is ~$35 per share, which represents ~20 upside potential, while the shares offer a high yield of ~7.2%.
With a sustainable payout ratio and investments beyond WGL, Altagas should be able to maintain its dividend, but it’s more likely to increase it in the future.
