Why AltaGas (TSX:ALA) Stock Fell 4.9% Yesterday

AltaGas’s stock price fell, despite what I would call a pretty solid first-quarter result, a defensive business, and a strong outlook.

| More on:
edit Businessman using calculator next to laptop

Image source: Getty Images.

AltaGas (TSX:ALA) stock has been going through a rough period lately. While this is not unusual in today’s turbulent times, it still seems unusual to me. After all, the company just reported a strong first-quarter result. Also, AltaGas is a defensive company that also has exposure to growth. Yet AltaGas stock fell 4.9% yesterday after the release of first-quarter results. Is this justified?

AltaGas’s stock price reacts to market fears and general market weakness

The S&P/TSX Composite Index declined 2.9% yesterday, as investors reacted to weak Canadian GDP news. Essentially, Stats Canada reported that February GDP showed no growth. Furthermore, March GDP declined by at least 9%, according to estimates earlier this month. We are all worried about the financial state of the country.

It is with this backdrop that investors digested AltaGas’s results. Despite an 11% increase in normalized EBITDA, investors were not impressed. The utilities segment EBITDA increased 10%, but the midstream segment reported a fall in its EBITDA. This fall was partly due to hedging losses. But in my view, it is greatly overshadowed by the company’s Ridley Island Propane Export Terminal (RIPET). This is the growth driver of the midstream segment, as the terminal is seeing strong demand. The company expects total propane exported volumes to increase 43% by the end of 2020. Asia continues by a prime source of this demand.

So, AltaGas stock has defensive attributes along with a promising growth area. The utilities segment will account for 60% of AltaGas’s EBITDA in 2020. This is the defensive segment. It is benefiting from rate base growth and lower operating costs. The midstream business is located in Western Canada and includes processing and export facilities. These assets are located in some of the fastest-growing markets in North America, including the Montney and Marcellus/Utica basins. This is the growth area.

AltaGas stock falls as investors worry about debt levels and dividend sustainability

AltaGas made a drastic cut to its dividend about a year and a half ago. This cut was necessary, as the company was too heavily indebted and needed a way out to relieve the pressure. Investors were disappointed, and this negatively affected the company’s reputation.

Let’s fast forward to today. AltaGas has transformed itself into a mostly utilities company, with 60% of its EBITDA coming from its utilities segment. The company has reduced its debt significantly. AltaGas has also reduced the risk inherent in its midstream business to a significant degree. The company has limited direct commodity price exposure, achieved through the use of hedges and long-term contracts.

This lower risk profile works to ensure the reliability of the dividend. AltaGas has maintained its investment grade rating and has ample liquidity. The dividend-payout ratio is in the range of 70-75%, and the dividend yield is 5.77%. The debt balance will continue to be worked down, further de-risking AltaGas stock.

As time goes on, I think investors will come to see AltaGas for the reliable, defensive company that it is.

Foolish bottom line

On the conference call, management was very optimistic about AltaGas’s future and the stability of its business. Guidance was maintained, which should drive investor confidence. I think that AltaGas stock fell yesterday, not because of the company’s results, but because of macro problems. In time, AltaGas stock should be recognized as just the type of stock that is needed in this time of crisis.

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. The Motley Fool recommends ALTAGAS LTD.

More on Dividend Stocks

financial freedom sign
Dividend Stocks

Generate Enough Passive Income to Retire

Looking to generate a stream of passive income to retire on? Here are several stocks to start building out your…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Stocks to Hold for a Reliable Source of Passive Income

Are you looking for a way to produce a reliable source of passive income? Hold these three stocks!

Read more »

worry concern
Dividend Stocks

3 Stocks to Buy if You Are Worried About a Recession

There are a lot of safe investments that can help your portfolio remain afloat during a recession and the market…

Read more »

Two colleagues working on new global financial strategy plan using tablet and laptop.
Dividend Stocks

2 Canadian Dividend Stocks I Just Bought During the Selloff 

There are plenty of high-quality investments to consider today, but these two Canadian dividend stocks are easily among the best.

Read more »

Dividend Stocks

Top 3 Utility Stocks for Stability and Consistent Income

These utility stocks could continue to return cash, irrespective of the volatility in the market.

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Tradeoff: Lower Home Prices for Higher Debt Burden

Buyers welcome lower home prices but more rate hikes will increase their financial burdens.

Read more »

Dividend Stocks

1 Top REIT to Buy Amid Housing Price Cooldown

Consider investing in this Canadian REIT if you want to capitalize on the housing price cooldown right now.

Read more »

stock analysis
Dividend Stocks

TFSA Passive Income: 2 Oversold Dividend Stocks for Self-Directed Investors

These top TSX dividend stocks look cheap right now.

Read more »