It has been a bit of a rough ride for AltaGas Ltd. (TSX:ALA) investors. Over the past year, its share price has dropped by approximately 20%, and it has lost about 13% year to date. This frustrating performance began with the announcement of its transformational acquisition of WGL Holdings Inc. The company took on a great deal of debt to finance the $8.4 billion deal, which was broadly perceived as being too expensive.
It has been over a year since the acquisition was announced, and AltaGas has inched towards finalizing the deal. Despite what seems like forever ago, the company is still on track to close the transaction later this year, which is consistent with the company’s original timeline. It recently received approval from Maryland regulators, and the only outstanding approval required is that of the D.C. Public Service Commission. It is expected that the D.C. Commission will issue its decision later this month.
Upon completion of the deal, the company will have $22 billion in assets, and it will generate twice as much earnings before interest, taxes, depreciation, and amortization (EBITDA) from its U.S. operations. Funds from operations (FFO) are expected to increase by 18-20%, and its company-wide EBITDA will jump by 25-30%.
Another key outcome is its increased exposure to regulated power market, which will lead to more predictable cash flows. According to AltaGas CFO, Tim Watson: “On a combined basis, approximately 85% of total EBITDA will be underpinned by contracts or regulated assets with no direct commodity or price or volume exposure.”
The deal is also anticipated to fuel continued dividend growth between 8% and 10% through 20201.
Despite short-term headwinds, AltaGas is playing the long game with the WGL acquisition.
The company’s recent price weakness has propelled its yield to record highs. As of writing, its yield stood at an astronomical 8.78%. The best part of the dividend is that it is sustainable and well covered by FFO. Don’t be tricked by its high payout ratio as a percentage of earnings, as it takes into account many one-time items associated with the WGL acquisition. The company is a Canadian Dividend Aristocrat and has raised dividends for six consecutive years.
What should investors do?
Quite simply, AltaGas is a buy. It is rare that investors can find a high-quality company that offers both significant income and growth. Once the final regulatory hurdle is overcome, the WGL acquisition will be immediately accretive to EBIDTA and cash flows. The company is trading at a cheap forward price-to-earnings ratio of 17.9, and the market is discounting the impact of the WGL acquisition.
As investors wait for the acquisition to close, they can enjoy significant monthly income. As mentioned previously, the company is playing the long game; you should, too.
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 Mat Litalien has no position in any of the stocks listed. AltaGas is a recommendation of Stock Advisor Canada.