The fantastic news regarding Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) is the increase in dividends paid, which came about in the past few weeks. The icing on the cake is the dividend is paid in U.S. dollars. Since the company generates substantial revenues in the United States, investors holding Canadian shares listed on the Toronto Stock Exchange (TSX) have the opportunity to either reinvest in more shares or receive cash.
The company offers investors the potential to receive the cash in either Canadian or U.S. dollars. The cash inflow and U.S. operations of this Canadian-listed company can be a way to obtain U.S. exposure without having to convert cash to U.S. dollars. Assuming we want to run a diversified portfolio, shares of Algonquin tick off many of the boxes on our list. As a utilities company with consistent cash flows, we are getting a defensive security offering an above-average dividend.
Defensive vs. cyclical
The difference between defensive and cyclical stocks is the consistency of revenues and profit across different periods in the economic cycle. During times of economic expansion or contraction, there will be little variability in the income statement of defensive companies. An example of this is Algonquin.
Cyclical stocks will have large fluctuations in revenues and profits (which become losses) which vary widely depending on the phase of the business cycle. Taking Harley-Davidson Inc. (NYSE:HOG) as an example, the company experienced a 23% decline in revenues from 2008 to 2009 on the heels of the Great Recession. The motorcycle company is a prime example of a cyclical company; investors purchasing at the right time can make multiples on their money.
In 2009, shares hit a low of approximately $8 only to rebound in the following year. In 2010, the shares traded in a range between approximately $21.50 and $36.
Getting back to our utilities company, Algonquin will probably never experience the loss in value and subsequent doubling or tripling of a company like Harley-Davidson. The risk profile of a company or an industry must be understood before the investor takes the leap of faith and invests.
With utility stocks, we may not be getting as much upside as compared to a cyclical stock at the bottom of the market cycle, but then again, we are not running the risk of a permanent loss of capital in any major way. For those interested, the historical pricing for Algonquin doesn’t go back beyond the end of 2009.
If everything goes according to plan, investors locking in at current prices will receive a yield in excess of 5.25%, and they have the opportunity for 10% capital appreciation per year over the next few years. Given the current dividend and potential to increase the dividend, the chances of receiving a 10% compounded rate of return in addition to the potentially increasing dividend is, in fact, exceedingly high.