Choosing the right stocks for your TFSA portfolio can be a simple task when we keep two things in mind: first, we should pursue a strategy that ensures capital preservation, and second, we should pursue a strategy that also ensures some growth. Our TFSA will be better off for it.
What this boils down to is that we should look for a company with staying power, a solid, leading position in its industry, and a real competitive advantage to help it weather any future storms.
AltaGas (TSX:ALA) has all of these things and more. It is a stock that has begun to recover from an ill-timed acquisition that sent the company on the road to a dividend cut and an aggressive asset sale program. The dividend cut happened in December 2018 after months of market speculation, and it was a drastic one, as the company finally pulled the trigger and slashed its dividend by 56%. In addition to the dividend cut, management also announced that the company would accelerate its asset sales program.
Solid growth plans
All of these moves have allowed AltaGas to focus on its midstream and utility assets located in some of the fastest-growing markets in North America, including the Montney and Marcellus/Utica basins.
The Montney formation, which is located in northern Alberta and British Columbia, is an extremely liquids-rich formation which holds an estimated 449 trillion cubic feet of natural gas, a substantial amount of natural gas liquids, and a significant amount of oil. It is a low-cost basin, which is very competitive even to the U.S. shale basins.
All that is needed is a build-out of infrastructure to take the gas out to different markets, including but not limited to the U.S. This is not a simple or easy task as we have seen in recent years, but even though progress is painfully slow, progress is happening, as we can see in some of AltaGas’s recent projects.
As an example, we have AltaGas’s Ridley Island Propane Export Facility, which was completed in May 2019 and will provide Canadian natural gas producers with the ability to import their propane to markets in Asia. Importantly, this project was completed on time and on budget, which is surely a confidence builder in the company and its management team.
Another project that AltaGas has been working on is the expansion of the Townsend Complex, the Townsend 2B project, which includes a gas gathering pipeline near Fort St. John, British Columbia. This project is expected to be completed in the fourth quarter of 2019 and is 100% owned by AltaGas.
AltaGas stock’s generous dividend is well supported. The dividend yield is currently a very attractive 4.9%, and despite the fact that it was reduced last year, the company is well positioned to fulfill its dividend obligations as well as its growth plans.
The fact that AltaGas has a highly defensive business segment, its utilities segment, which accounts for 33% of the company’s total EBITDA, also goes a long way in providing comfort for investors. This segment provides returns that are regulated, so they are predictable and highly visible and defensive.
We can also look to the rest of the company’s EBITDA and derive comfort in the fact that approximately 75% of the company’s total EBITDA is backed by medium- to long-term contracts.
Finally, we should make note of the fact that AltaGas has stepped up its asset sales program, which is expected to bring in an additional $1.5-2 billion in 2019. In light of this, we can expect the company to further reduce its debt and improve its balance sheet, thus giving us more confidence in the sustainability of AltaGas stock’s dividend.
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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 Karen Thomas owns shares of ALTAGAS LTD. AltaGas is a recommendation of Stock Advisor Canada.