Will Altagas Ltd. Cut its Generous Dividend?

One key factor that attracts investors to Altagas Ltd. (TSX:ALA) is its generous dividend. At under $31, the shares yield about 6.8%. Investors should note that the company has raised its dividend for five consecutive years.

High, sustainable yields are uncommon, and big dividends sometimes end up being cut. Could Altagas’s juicy yield be in jeopardy?

Why does it have a big yield?

The recent pullback has made Altagas shares cheaper and pushed its yield higher. The pullback from the $33 level was due to the news that Altagas would be acquiring WGL Holdings Inc. (NYSE:WGL).

Altagas is seemingly paying a hefty premium for WGL Holdings. And whenever there’s an acquisition, there’s increased uncertainty around the acquirer. Thus, the acquirer tends to fall in price. So, it’s understandable why Altagas fell more than 6% after the news came out.

WGL Holdings would be a wonderful addition to Altagas

However, WGL Holdings is a quality company with fitting assets to add to Altagas’s portfolio of contracted power, regulated gas distribution, and highly contracted midstream assets.

natural gas holders

WGL Holdings is a high-quality utility with a solid balance sheet; it’s been awarded a high S&P credit rating of A+.

The company has diversified energy-infrastructure assets, consisting of gas utilities, gas pipelines, and clean power.

Specifically, regulated gas utilities represent about 77% of its assets.

The acquisition will triple Altagas’s utility customers and increase its power-generation gross capacity to about 1,900 MW. Moreover, WGL Holdings has $4.6 billion of investment opportunities, which will be a significant addition to Altagas’s original opportunities of nearly $2.7 billion.

If all goes well, Altagas will acquire WGL Holdings by the end of the second quarter of 2018.

Will Altagas slash its dividend?

If you look back in history, you’d see that Altagas cut its distribution in 2010. However, Altagas is not to blame for it.

The energy-infrastructure company was previously an income trust, but in 2011, Canadian income trusts (other than real estate investment trusts) were forced to convert into traditional corporate structures. As a side effect of this transition, the stock’s distribution was cut.

Since the change in July 2010, Altagas has not once cut its dividend. In fact, since then, the company has increased its dividend steadily for five consecutive years by 8.7% per year on average.

If anything, the acquisition will improve the safety of Altagas’s dividend. It is expected to be accretive to earnings per share by 8-10% and funds from operations (FFO) per share by 15-20% on average through 2021. And it’d support an 8-10% annual dividend growth for Altagas through 2021 with a reduced payout ratio.

The takeaway

With a normalized FFO payout ratio of about 61%, Altagas’s dividend should be sustainable. If the WGL acquisition succeeds, it will improve Altagas’s dividend-growth prospects.

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Fool contributor Kay Ng owns shares of ALTAGAS LTD. Altagas is a recommendation of Stock Advisor Canada.

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