Get Growth and Income Too

Is it too late to buy Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) after a run-up of 15%?

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

When it comes to utilities, investors expect a rich dividend.

Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN) doesn’t disappoint.

Its annual payout of US$0.466 per share is good for a 5% yield for Canadian investors, as the U.S. dollar has been strengthening against the Canadian dollar. The high yield is secured by the company’s stable cash flow generation and a conservative payout ratio.

What fuels Algonquin’s cash flows is its diversified portfolio of rate-regulated distribution utility and power-generation assets.

Other than a juicy dividend, Algonquin also offers stable growth. The diversified North American utility reported promising fourth-quarter and 2016 results on Thursday and has growth plans through 2021.

money, cash, dividends 16-9

Recent results

In 2016, Algonquin generated nearly $1.1 billion of revenue, which was 7% higher than the previous year.

Additionally, its adjusted funds from operations per share and adjusted earnings per share increased by 14.5% and 24%, respectively.

The successful acquisition of Empire District Electric at the start of the year and the recent addition of newly constructed renewable electric generation of 360 MW are expected to help Algonquin deliver record earnings in 2017.

Five-year growth plan

Empire is a big part of Algonquin’s growth plan through 2021. It added about 218,000 distribution customers to Algonquin’s portfolio. In total, Algonquin now has regulated utility operations in 13 states, serving more than 782,000 gas, water, and electric utility customers. The bigger portion of regulated earnings implies a safer dividend.

Excluding Empire, Algonquin has $5.4 billion of potential investments (about 44% for its power-generation portfolio and 55% for its regulated utilities) over the next five years.

Juicy dividend

Algonquin’s rate-regulated utilities and power generation, which are largely under long-term contracts, generate stable cash flows for its dividend.

Algonquin pays out less than 40% of its funds from operations as dividends. The remaining cash flow is reinvested into the business for growth.

With Algonquin’s strong cash flow generation, it’s no wonder that management had the confidence to hike its dividend by 10% in the first quarter.

That marks the beginning of its seventh consecutive year dividend hike. In fact, management aims to hike its dividend by 10% per year as far out as 2021.

Valuation and expected returns

At about $12.50 per share, Algonquin trades at a price-to-earnings ratio of about 23 and a price-to-cash flow ratio of roughly 11.

These are reasonable valuations for the double-digit growth that the utility has been experiencing. Management anticipates its earnings and funds from operations to grow north of 10% per year on a per-share basis.

The 12-month mean price target across 12 analysts at Reuters is $13.70. So, an investment in Algonquin today can return about 14% in the next year.

Investor takeaway

Algonquin has had a nice run-up since November. However, it’s still a reasonable buy for double-digit returns and a 5% yield. If the shares dip below $11, it’d be a strong buy.

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 owns shares of ALGONQUIN POWER AND UTILITIES CORP.

More on Dividend Stocks

analyze data
Dividend Stocks

2 Safe Dividend Stocks That Could Help You Fight Inflation

A dependable stream of passive income is one way to help offset rising inflation rates. Here are two top dividend…

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

Stay Invested in a Recession: Increase Positions in 2 Value Stocks

The suggestion of market analysts is to increase positions in two value stocks if you want to stay invested amid…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Dividend Stocks to Buy as Inflation Surges in Canada

If you're worried about how surging inflation may impact your portfolio, here are three of the best dividend stocks to…

Read more »

You Should Know This
Dividend Stocks

High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

Read more »

STACKED COINS DEPICTING MONEY GROWTH
Dividend Stocks

TFSA Investors: Turn $1,000 Into $10,000 in 10 Years

10-fold growth within a decade is rare but not unheard of. You can capture this growth either by predicting a…

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

1 Oversold REIT Stock to Buy for Safe Dividends

If you're looking for stable dividend income from an oversold stock, this office REIT is a perfect option.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

3 Cheap Canadian REITs to Buy in 2022

Are you looking for passive income? Start treasure digging in cheap Canadian REITs in this market correction!

Read more »

Dividend Stocks

TFSA Passive Income: 3 Undervalued, High-Yield TSX Dividend Stocks to Buy Now

These top TSX dividend stocks with high yields now look attractive to buy for TFSA passive income.

Read more »