It was just a few short months ago when it seemed like everyone was bearish on AltaGas (TSX:ALA).
It all started with the company’s acquisition of WGL Holdings, which enabled the company to get a big U.S. presence. But most analysts agreed AltaGas paid too much for its prize, which stretched the balance sheet. Management vowed to sell non-core assets to get the debt down, but the dividend was cut shortly after the acquisition closed. AltaGas went from a dividend-growth darling to a banished dividend cutter remarkably quickly, and income investors reacted exactly how you’d expect. They sold their shares and headed for the exits.
I looked at the stock differently, doing my best to ignore the dividend cut. And what I saw was a company that was poised to generate a lot of cash flow once the WGL acquisition would be reflected in the bottom line. The debt was still a problem, but the impressive cash flow and a more reasonable dividend would allow it to get the balance sheet in decent shape relatively quickly.
The company’s 2019 guidance sealed the deal. But since it came out the same day the dividend cut was announced, everyone ignored it. Funds from operations (FFO) are expected to be between $850 and $950 million in 2019. The company has approximately 276 million shares outstanding. That puts FFO between $3.08 and $3.44 per unit.
It could easily be higher next year, as AltaGas has several growth projects coming online in 2019 and 2020.
Remember, shares fell to a low of under $13 each right after the dividend cut was announced, bottoming out at under $12 each right before the end of 2018. Enticed by the cheap valuation, I bought in. It’s turned out to be a great investment, rising close to 50% in fewer than six months.
What’s next?
I don’t think AltaGas is anywhere close to done yet. I truly believe shares could be much higher by the end of 2020. They could even double from here.
The big reason I think this can happen is the stock should go from insanely cheap to reasonably valued. Shares are currently quite cheap on a number of metrics, including from a price-to-funds from operations and price-to-book value perspective. Let’s take a closer look at the latter ratio first.
AltaGas spent much of the past five years trading at approximately 1.5 times book value. It currently trades at about 0.8 times book value. Getting back to that historical valuation would put shares at approximately $35 each, which is almost a double right there.
Shares currently trade at just over six times the low end of 2019’s expected funds from operations. This ratio should be much higher as the stock recovers and the taint from the dividend cut wears off. Historically, we can see this has happened.
For example, in 2013, AltaGas earned $3.47 per share in funds from operations. Shares peaked at more than $52 each in 2014, putting the price-to-FFO valuation at 15 times. If shares traded at that valuation today, they would be worth between $46.20 on the low end and $52 on the high end. Assuming 2019’s earnings turn out as expected, of course.
Finally, AltaGas shares should recover as the economy in Alberta picks up. Remember, the company owns all sorts of midstream assets in the province, transporting much of the natural gas produced. As the economy gets better, so will the valuation of that part of the company.
The bottom line
As you can see, it’s not outside the realm of possibilities for AltaGas shares to keep soaring in 2019. I firmly believe the stock will end up higher, as the company continues to post good results. Could shares even double? It could happen.
And remember, even after the dividend cut, the stock still pays a generous $0.08-per-share monthly dividend — good enough for a 5% yield. That’s a nice consolation prize if the capital appreciation potential fizzles out.
