The Best Income and Growth Opportunity in the Utility Space

Utilities can help stabilize your portfolio in the stormy sea of the stock market, in which share prices rise and fall. Many utilities tend to generate stable cash flows from their operations. In turn, these companies typically offer safe dividends.

Algonquin Power & Utilities Corp. (TSX:AQN) is a solid utility you can consider for steadily growing income and upside potential. Right now it trades at an attractive forward multiple.

Business overview

Algonquin has a $5 billion diversified North American portfolio of generation, transmission, and distribution assets. It holds both regulated and non-regulated assets, which deliver predictable earnings and cash flows with upside potential.

Management cares about returning shareholder value. So, it’s focused on per-share growth in earnings and cash flow to support dividend growth and share price appreciation.

Core business segments

In Algonquin’s Generation business, it has non-regulated renewable and thermal electric generation assets with an installed capacity of 1,300 megawatts. The utility’s renewable assets are powered by wind, solar, and hydro.

Its diversified distribution business provides water, electricity, and natural gas utility services to more than 560,000 U.S. customers. These are all rate-regulated assets, which generate stable earnings and cash flows.

The utility distributes electricity to 93,000 customers in two states, natural gas to 293,000 clients in six states, and water to 178,000 connections in seven states.


At below $12 per share, Algonquin yields 4.7% thanks partly to a strong U.S. dollar against the Canadian dollar. Its payout ratio is expected to be about 74% this year, which is sustainable.

Since 2010 the company’s dividend per share has grown from US$0.06 to US10.59 cents, which equates to annualized growth of 9.9%. In Canadian dollar terms, it has translated to a higher growth rate.

Additionally, the utility’s pipeline of projects should allow for cash flow growth, which translates to a safer dividend and likely dividend growth through 2018.


Much of Algonquin’s growth will come from its generation-development project pipeline of about 500 megawatts. Most have a contract life of 20 years.

Specifically, Algonquin has 259 megawatts of capacity expected to come online through 2017 and 252 megawatts in 2018. These projects exclude the 200-megawatt Odell Wind Project, which began its operations in Minnesota in early August.

These projects will boost the utility’s earnings and cash flows as they come into service and support future dividend growth.


First, Algonquin offers an above-average yield of 4.7%, which is well covered by its cash flows.

Second, management seems to be committed to hiking its dividend every year. It has been growing its dividend since 2010.

Third, the utility has renewable-generation projects anticipated to come online through 2018, which will boost its cash flows.

Last but not least, it normally trades at a price-to-cash-flow ratio (P/CFL) of 12. However, at below $12 per share, it trades at an attractive forward P/CFL of about 8.5.

An investment today could deliver an annualized 12-18% price appreciation in the next few years while offering a decent dividend. So, this implies estimated annualized returns of 16-22%, which is an enticing opportunity for an investment in a stable utility.

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Fool contributor Kay Ng owns shares of ALGONQUIN POWER AND UTILITIES CORP.

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