Energy infrastructure providers and utilities belong to a market segment where you can still find some value. Stocks in many sectors look expensive these days after a record rally, which doesn’t seem to be halting anytime soon.
A rout in commodity markets during the past five years hit the oil producer hardest for obvious reasons. But in this selloff, energy infrastructure companies and utilities also saw their values tumble, despite the fact that most operated under the fee-based cash flow models, which protected their revenues in the downturn cycle.
In Canada, Enbridge Inc. (TSX:ENB)(NYSE:ENB) is a good example. The world’s largest pipeline operator is down ~20% this year and offers great value to investors seeking a long-term investment for income potential.
Algonquin is a diversified utility with over $10 billion of assets in the U.S. and Canada. Through its two business groups, Algonquin provides rate-regulated natural gas, water, and electricity services to over 750,000 customers in the U.S.
It generates about 70% of earnings from regulated utilities and 30% from contracted renewable power. Over the past few years, Algonquin has grown through a very smart acquisition strategy. It has bought some high-quality assets from large U.S. utilities through its wholly owned subsidiary, Liberty Utilities.
In its most recent deal with the Spain-based Abengoa, S.A., Algonquin is now eyeing markets outside North America. According to this agreement, Algonquin will purchase from Abengoa a 25% equity stake in Atlantica Yield plc for US$608 million.
A stake in Atlantica will give Algonquin an exposure to a geographically diverse, long-term contracted portfolio of 21 facilities, representing 1.7 GW of clean power-generating capacity, 1,770 kilometres of electric transmission lines, and two desalination plants in global markets including South America, Europe, and Africa.
Due to this explosive growth over the past five years, Algonquin’s share price has more than doubled. This year alone, its shares are up ~23%, trading at $14.09 at the time of writing.
This stellar performance shows the success of the company’s growth strategy and its ability to generate superior returns when compared to other Canadian utilities.
With an annual dividend yield of 4.19%, which translates into a US$0.1165-a-share payout, Algonquin stock seems very attractive and provides a good diversification opportunity.
Which one is better?
Both Algonquin and Enbridge are solid dividend stocks for your income portfolio. Enbridge is targeting 10-12% dividend growth each year until 2024, while Algonquin plans to increase its dividend payout by 10% each year for the next five years.
The only disadvantage for Algonquin investors is that the company pays dividend in the U.S. dollars, and that might expose you to a currency risk if you want to convert your income back into Canadian dollars. But that risk is well compensated through the huge growth potential that Algonquin stock offers. I am long on both utilities.