A Stable Utility for Growing Your Income

Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) is a stable investment for investors looking for a growing income.

| More on:
The Motley Fool

Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) stock has below-average volatility because of the nature of its business. It provides products and services that are needed in all kinds of economic environments, and it generate stable and growing cash flows, which allow the utility to grow its dividend over time.

Algonquin positions itself for stable growth through a mix of regulated utilities and non-regulated power generation.

wind generation facility

Algonquin’s regulated utilities

Algonquin generates about three-quarters of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from its regulated electricity, natural gas, and water distribution utilities across 12 U.S. states with a total of 757,000 customers. This part of the portfolio has returns on equity 9-10%.

Algonquin is always on the lookout to expand its fleet. In late August, the company announced it was working on acquiring a regulated utility distribution business in New York state from a subsidiary of Enbridge. Subject to regulatory approvals, the acquisition is expected to close sometime next year and will add ~16,000 customers in a new jurisdiction.

Algonquin’s power-generation portfolio

Algonquin generates about a quarter of its EBITDA from its power-generation portfolio, of which 70% is in the U.S. and 30% is in Canada. It has a net installed capacity of 1,500 megawatts across eight states and six provinces.

Moreover, 88% of its generation is under long-term power-purchase agreements with inflation escalations. Its average power-purchase agreement length is 16 years.

Algonquin expects to continue its focus on wind-power generation. In 2016, 64% of its renewable energy mix is wind. By 2020, it estimates to have wind as 81% of its power generation. Its other forms of generation include hydro, solar, and thermal.

Algonquin’s dividend

Since most of Algonquin’s assets are either regulated or have long-term purchase agreements, the company’s earnings and cash flow generation are very predictable. This supports a safe dividend.

Compared to the second quarter in 2016, Algonquin’s adjusted earnings and funds from operations increased by ~18% and ~5.7%, respectively, on a per-share basis in the second quarter of 2017. This was the result of the growth from its internal projects, the impact of rate increases from its utilities, and acquisitions.

Notably, Algonquin offers a U.S. dollar-denominated distribution, which will cause its yield to fluctuate — the stronger the U.S. dollar against the Canadian dollar, the higher the yield. Based on the recent foreign exchange rate, Canadian investors can get a yield of nearly 4.3%.

Management aims to increase the dividend per share by 10% per year through 2021, which should support steady share price appreciation over time.

Investor takeaway

An investment in Algonquin gets you a starting yield of nearly 4.3%, as well as a dividend that is expected to grow 10% per year for the next few years. Barring a market-wide correction, the stock’s share price should also steadily move higher. In summary, Algonquin is a good idea for conservative investors and is a great buy on any meaningful dips.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of ALGONQUIN POWER AND UTILITIES CORP. and ENBRIDGE INC. The Motley Fool owns shares of Enbridge. Enbridge is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »