Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) is a diversified North American utility, whose portfolio primarily consists of non-regulated generation assets and regulated distribution assets.
Specifically, it has more than 1,300 MW of installed capacity, of which 65% is wind powered, 24% is thermal powered, and the rest is hydro or solar powered. It also operates electricity, natural gas, water distribution and wastewater-collection services to about 564,000 connections.
These assets help the company to generate consistently growing cash flows to support a safe dividend.
If you’d invested in Algonquin at the start of the year, you would’ve received nearly 32% more in dividends thanks to the U.S. dollar–denominated dividend and a strong U.S. dollar against the Canadian dollar throughout the year.
Accomplishments
Algonquin had a nice start in 2016. It began by completing the acquisition of a US$327 million water distribution utility.
The distribution utility owned and operated three regulated water utilities, which serve 74,000 customers across southern California and western Montana.
At the end of July, Algonquin’s Odell facility, a 200 MW wind facility, came into service. It was the ninth wind facility in its portfolio.
Algonquin started trading on the New York Stock Exchange at the end of November. The exchange serves as an additional source of financing.
Throughout 2016, Algonquin has been working on the US$2.4 billion Empire District Electric acquisition, including getting approvals from the FERC and other regulatory bodies in these states: Missouri, Kansas, Oklahoma, and Arkansas. Management anticipates the acquisition to close in early 2017 and to increase its distribution customer base by a third.
Other big events
Insider buying is always viewed as a positive sign. In March, three executive officers, including CEO Ian Robertson, bought $22.7 million worth of shares. At that time, the shares were trading at just below $11 per share.
Coincidentally, the shares are trading roughly at that level today, while the company has grown to be larger and more diverse.
In May, Emera sold most of its Algonquin shares–worth roughly 19.3% of Algonquin at the time. Emera’s CEO said, “The sale of shares was a capital-allocation decision to support our proposed TECO Energy acquisition.” Emera still owns about 5% of Algonquin.
Growing cash flows and dividend
In the first nine months, Algonquin’s adjusted funds from operations (FFO) per share were nearly 11.8% higher than the same period in 2015. Additionally, less than 43% of the adjusted FFO were paid out as dividends. So, there was enough cash left over to run and grow the business.
The growing FFO and conservative payout ratio allow Algonquin to grow its dividend. The utility hiked its quarterly dividend by 10% (on a constant currency basis) in the second quarter. The raise was even bigger when translated to the Canadian dollar.
Management thinks Algonquin’s growth plan can support dividend growth of 10% per year for the next five years.
The takeaway
Algonquin is set for another year of growth. It has about 80% of its business in the U.S. A strong U.S. economic backdrop and a strong greenback (against the loonie) should allow Algonquin shareholders to enjoy a faster-growing dividend stream (supported by cash flow growth) compared to most other utilities.
The iShares S&P/TSX Capped Utilities Index Fund, which consists of 14 utilities, including Algonquin as its seventh-largest holding, yields 3.8%, while Algonquin yields 13% higher.
Fair-value Algonquin is a good choice for conservative investors looking for income, income growth, and total returns. Higher dividends will eventually lead to price appreciation.
