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When one thinks about renewable power companies in Canada, Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) might not be the first company to come to mind. That said, I think this is the perfect company for investors interested in ESG to gain exposure.
Here’s why.
Renewable power is the key to Algonquin stock
Most investors know that Algonquin is primarily a regulated utilities play. Indeed, regulated utilities is a huge component of Algonquin’s business model. These cash flows are extremely safe and provide a solid base from which the company can grow long term.
What some investors may be unaware of is the size and scale of the company’s renewable power business. Currently, renewable power generation makes up around one-third of the company’s revenues. Algonquin has made well-timed acquisitions in this space in the past, and shareholders are now reaping the benefits.
Renewable power generation is only going to grow over time. Governments will want to pick sectors like renewable power to focus on for stimulus measures moving forward. Additionally, green energy generation is needed for carbon-reduction targets. Thus, broad government support for companies in the renewable power space is a viable long-term tailwind. I see capital inflows into this sector only accelerating in the years to come. This factor could expand the multiples of stocks like Algonquin that may be undervalued given current capital flow levels.
The dividend is a Canadian investor’s dream
Algonquin’s dividend of around 3.8% may not seem like something to write home about. That said, I like this dividend from a Canadian investor perspective for two reasons.
The first is that this dividend is paid in U.S. dollars. If one expects the U.S. dollar to strengthen over the long term, this helps diversify one’s portfolio. Additionally, Algonquin’s revenue is all generated in U.S. dollars, so this entire stock is a play on the U.S. regulated utilities and renewable power sector. Canadian investors with too much domestic exposure can gain geographic diversification easily with this dual-listed stock.
Second, I see a tremendous amount of optimism around long-term dividend increases. Algonquin’s cash flow growth and existing payout ratio provide substantial room for such increases over time. Thus, I expect to see mid- to high single-digit dividend increases annually over the long term for investors. Accordingly, this is a stock that every income investor should want to own over the long run.
Bottom line
Algonquin is perhaps one of the best companies on the TSX today for various reasons. This company provides growth, income, and defensiveness at a time when the market could correct at any time. Accordingly, investors worried about a market crash and want a stock with secular tailwinds should consider Algonquin today.
