Should You Buy Altagas Ltd. for its 6.4% Yield?

Before buying Altagas Ltd. (TSX:ALA) for its 6.4% yield, this is what you should know.

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The low-interest rate environment has driven more people to the stock market in search of higher yields. If you’re looking for safe yields in the market, check out Altagas Ltd. (TSX:ALA), which offers a yield of close to 6.4% today.

Altagas pays eligible dividends that are more favourably taxed in a non-registered account compared to your job’s income. The company has the potential to grow its dividend to help you counter inflation and maintain your purchasing power.

The business

Altagas is a diversified business. It processes and moves about two billion cubic feet of natural gas and natural gas liquids per day, it generates power from four fuel types, and it has five utilities that deliver natural gas to 560,000 residential and commercial customers.

Altagas earns 42% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) from its contracted-power business segment, 37% from its utility business, and 21% from its midstream business.

Geographically, it earns about 50% of its EBITDA from Canada and 50% from the U.S. So, a strong U.S. dollar against the Canadian dollar increases Altagas’s earnings.

Earnings

Altagas has consistently increased its EBITDA generation from all three of its businesses over time. Simultaneously, it has been reducing its EBITDA’s commodity exposure, which reduces the risk and volatility of its earnings.

Altagas’s EBITDA grew from $230 million in 2010 to $600 million in 2015. This year it’s expected to generate about $780 million of EBITDA.

At the same time, its EBITDA’s commodity exposure has reduced from 50% in 2010 to 7% in 2015. This year the commodity exposure is expected to be only 1%.

Dividends

Altagas’s cash flows are supported by long-term contracts that average from about 14 to 17 years. These stable cash flows support a safe dividend.

Since 2010 Altagas has increased its monthly dividend from $0.11 to 16.5 cents per share, which is an annualized growth of 7%.

At about $31 per share, Altagas yields 6.4% with a payout ratio of about 57% based on the funds from operations it generates.

Going forward

By the end of 2020 Altagas wants its midstream business to generate about a third of its EBITDA. So, it’ll be investing more in that business segment.

Through 2020 Altagas plans to invest $2,570-3,010 million, of which about 50% will go to midstream projects, about 28% will go to power projects, and roughly 23% will go to utility projects.

Conclusion

This year Altagas’s funds from operations cover its dividend and a part of its capital program of $550-650 million. Other sources of funding for its capital spending include loans, preferred shares, non-core asset sales, and reinvested dividends from shareholders.

Altagas is a diversified business with an S&P credit rating of BBB and a reasonable debt-to-cap of 45%.

Altagas trades at a reasonable valuation of 8.8 times its cash flow. The company’s safe 6.4% yield can help boost the income for your diversified portfolio.

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 has no position in any stocks mentioned. Altagas is a recommendation of Stock Advisor Canada.

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