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Is Altagas Ltd. a Buy at a 52-week Low?

This past week, shares of Altagas Ltd. (TSX:ALA) hit a 52-week low of $29.54, signaling that not everything is going in the right direction for the company. While the good news for new investors is that the low price has translated to a much higher dividend yield, this payment is not written in stone and could be reduced in the near future.

Operating in the gas, power, and utilities sector, the company has seen top-line revenues remain stagnant over the past four fiscal years. Revenues for fiscal 2013 were $2,042 million, followed by $2,406 million in 2014, then declining to $2,192 million in 2015 and $2,190 in 2016. Although revenues in fiscal 2017 have increased substantially year over year for the first quarter, the challenges faced by the company are still present. The bottom line: earnings per share (EPS) declined from $0.38 per share for Q1 2016 to $0.19 in Q1 2017.

By looking at the company’s EPS over the past four years, the downward trend has been very clear. With steady declines for three years, EPS jumped in 2016 to $0.99 per share. Although higher earnings are good for investors, the challenge the company is currently facing is a dividend which totaled $2.03 per share for the year. While the total dividends paid by the company were about $364 million for fiscal 2016, the amount is expected to be at least the same (or higher) in the upcoming year given the current dividends per share.

While high payouts may sometimes be a good thing for investors, the company must maintain a payout ratio which exceeds the total amount of earnings and accounts for 80% of cash flow from operations (CFO). Things have improved during the first quarter of the year, but dividends still represented close to 50% of CFO and 200% of net earnings. There is still danger that investors will see the 7% dividend yield be cut in half (or worse) if the fundamentals of the industry do not turn around soon.

Capacity will not be a challenge for this company. Altagas has continued to deploy capital into long-term capital spending, which has continued to exceed the amount of depreciation reported in each of the past four years. Clearly, the capacity to drive revenues and profits will be there in the future. But will the price being offered be high enough to translate to a better bottom line?

Considering the technical indicators, shares have traded sideways for several months now and are currently near a 52-week low. The simple moving averages (SMA) have broken through support levels and are beginning to establish a new base. Once the 50-day SMA catches up with the 10-day SMA at a lower level, a new support may be established and a breakout could follow.

While investors must remain patient, the reality remains that Altagas will offer huge potential for capital appreciation once the industry turns the corner and fundamentals improve.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned. Altagas Ltd. is a recommendation of Stock Advisor Canada.

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