AltaGas (TSX:ALA) is one of the highest-yielding dividend stocks on the TSX. With a 6.88% yield, it can generate up to $6,880 in annual income if you own just $100,000 worth of shares. That kind of payout is enough to make any investor salivate.
But there’s a catch: AltaGas is an energy stock, and energy has been performing very poorly lately. Despite Western Canadian Select crude having more than doubled since November, TSX energy stocks are still trading near 12-month lows.
AltaGas is no exception: as of this writing, it sat at $14.02, down from $29.08 this time last year. This steep decline partially explains why the stock’s yield is so high. But does a high yield really justify buying a stock in such a protracted downtrend? To answer that question, we need to look at the company’s profitability.
Profitability
AltaGas is usually profitable but has a rocky earnings history. Over the past four fiscal years, the company’s full-year earnings have dipped twice.
If we zoom in on the 2018 calendar year, the picture becomes a little uglier. In Q3, the company reported a $726 million net loss applicable to common shares — greater than the profit generated in the three preceding quarters. The end result was a nine-month loss of $676 million. Absent a Hail Mary in Q4, AltaGas seems destined for a losing year in fiscal 2018.
However, management claims that this will be a temporary condition: the company reported a “normalized” loss of just $17 million in Q3, saying its losses for the quarter were due to unusual non-recurring circumstances.
A battered sector
AltaGas’s recent earnings woes are part of a broader pattern in the Canadian energy sector. Over a 12-month period, the S&P/TSX Capped Energy Index has shed approximately 21% of its value, while Western Select Crude fell 18% in the same time frame. The latter figure may explain the former: a company that extracts and sells crude will earn less if the price of crude falls.
This doesn’t explain AltaGas’s tough year: the company only extracts natural gas (not crude) and actually operates partially as a utility. However, negative sentiment toward a sector can bring down individual stocks within it, which when added to AltaGas’s Q3 earnings miss, can explain the company’s 12-month losing streak.
A closeup on income
For Q3, AltaGas declared $162 million worth of dividends, which was up from the same quarter in 2017. However, because the company lost money in the quarter, such a large dividend payout may not have been the best move for management to make.
AltaGas does have about $22 billion in assets, so it can keep paying large dividends indefinitely, even when losing money in the short term. However, only $14 million of those assets were cash and cash equivalents, so keeping up the payments would require selling assets (assuming the company doesn’t return to profitability in short order).
As Fool contributor Kay Ng noted, AltaGas is already selling off assets, which puts the company’s cash flow at risk. For this and other reasons, AltaGas’s dividend probably isn’t the safest you’ll find on the TSX.
