Energy Investors: This Dirt-Cheap 8.5% Yield Stock Just Confirmed its Dividends Are Safe

AltaGas Ltd. (TSX:ALA) stock is screaming for attention after a strong first-quarter earnings report.

| More on:

AltaGas Ltd. (TSX:ALA) just reported its first-quarter 2018 numbers, and if there’s one thing that stands out in the report, it’s management’s confirmation of its growth projections for funds from operations (FFO).

That’s great news for income investors who’ve been wary about AltaGas stock’s recent price drop that has sent its dividend yield soaring to 8.5%. As of this writing, AltaGas shares are still down roughly 13.7% year to date, despite a nearly 4% rise in the past month.

Key AltaGas numbers you should know

AltaGas’s revenue jumped 14%, and net income surged 53% year over year to $49 million during the first quarter thanks primarily to lower taxes and expenses related to the company’s impending acquisition of WGL Holdings Inc. (NYSE:WGL).

AltaGas’s FFO climbed nearly 16% year over year. Thanks to lower acquisition-related costs, the company’s normalized FFO came in flat at ~$169 million.

Not only were AltaGas’s numbers strong last quarter, but management also remains optimistic about the WGL acquisition, which should put to rest some of the market’s concerns.

What AltaGas expects from WGL

During its just-released quarterly report, AltaGas confirmed it expects to close the acquisition by mid-year 2018. At the same time, AltaGas projects the combined entity’s:

  • Normalized earnings before interest, tax, depreciation, and amortization (EBITDA) to increase by 25-30%.
  • Normalized FFO to grow 15-20%.

Those projections have been intact over recent quarters.

AltaGas further reiterated that it expects “strong” accretion to earnings per share and normalized FFO from the acquisition through 2021, and expects “visible” dividend growth between 2019 and 2021, despite a “conservative” FFO payout.

That means two things. First, “visible” dividend growth could mean AltaGas is confident of growing its dividend by 8-10% through 2021, as it recently projected.

Second, AltaGas also recently guided for 50-60% FFO payout, which means accretive FFO from the acquisition should be able to support higher dividends, leaving the company with enough cash to pare down debt and reinvest in growth projects.

Why AltaGas stock is dirt cheap now

AltaGas has several ongoing growth projects that are on track. Excluding WGL, AltaGas expects to spend $500-600 million in capital expenditures, half of which will go to its gas segment and the rest to utilities and power combined. The company’s gas segment in particular should benefit from WGL’s pipeline investments in the Marcellus-Utica regions aside from AltaGas’s expansion

With the WGL acquisition projected to add 1.2 million utility customers, there’s no denying that AltaGas is taking a big leap forward with the deal.

A back-of-the-hand calculation pegs AltaGas’s normalized FFO for the trailing 12 months at roughly $3.55 per share. That means at current prices, AltaGas is trading at just around seven times price-to-normalized FFO. That looks like a steal considering the stock’s FFO growth potential and the hefty 8.5% yield that you can collect.

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 Neha Chamaria has no position in any of the stocks mentioned. AltaGas is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Best Stock to Buy Right Now: Enbridge vs TC Energy?

Enbridge and TC Energy rebounded nicely over the past year. Are more gains on the way?

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

2 Utility Stocks That Are Smart Buys for Canadians in November

Are you looking for some of the smart buys to consider in November? These utility stocks offer growth and a…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is Power Corporation of Canada Stock a Buy for its 5% Dividend Yield?

Is Power Corporation of Canada (TSX:POW) stock's 5% dividend yield worth it? Discover why this resilient stock could be a…

Read more »

hand stacks coins
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These three dividend stocks are ideal for strengthening your portfolio and earning a stable passive income.

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »