This Stock Is up 45%: Stagflation Could Push it Higher

Stagflation could impact your portfolio, but energy stocks like AltaGas (TSX:ALA) may prove resilient.

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The inflation rate is at a 30-year high. This is bad news but is somewhat offset by the drop in unemployment. The unemployment rate is back to pre-pandemic levels, which means much of Canada is at least earning an income as cost pressures rise. 

Unfortunately, this story could change if we enter a recession. Having a recession during an inflation crisis causes a unique phenomenon known as stagflation. Most of the economy suffers during such a cycle, and investors have few good investment options. 

One of these good options is energy. Midstream gas infrastructure company AltaGas (TSX:ALA) is a good example. Here’s a closer look at this potential stagflation hedge. 

AltaGas stock

The stock was up by more than 45% in 2021, outperforming the TSX, which was up by about 20% over the same period. It’s off to a great start this year too. Year to date, the stock is up 3.8%. 

This performance shouldn’t be surprising considering that the company owns a balanced portfolio of low-risk and well-regulated utility assets. It also operates high growth midstream businesses that helped it deliver strong shareholder returns.

Consistent growth in earnings and funds from operations is arguably the reason why AltaGas is flying high right now. Management is projecting an 8-10% compounded annual growth rate (CAGR) for earnings and dividends. The ongoing natural gas price surge makes these targets far more realistic. 

Strong free cash flow base

With natural gas prices soaring amid elevated inflation levels, AltaGas is well positioned to generate significant free cash flows from its operations. In the third quarter, it increased its funds from operations by 53% year over year to $0.61 as normalized EBITDA rose 15% to $244 million. The company is already ramping up its export facility to also address the growing demand from abroad, mostly in Asia.

While riding high on solid fundamentals, the Canadian energy infrastructure company also boasts a high dividend yield of 3.8%. It has consistently increased its payout by 4% last year and plans to increase by 6% this year, affirming its credentials as a shareholder-friendly energy company. 

The stock is currently trading at a discount at a price-to-earnings multiple of 15. That implies an earnings yield of 6.67% — far better than most blue-chip stocks on the Canadian market. 

Put simply, AltaGas is a low-risk bet for investors who are worried about the near-term outlook for the global economy. 

Bottom line

At the moment, inflation is at a historic high, while unemployment is at a historic low. Experts worry that inflation could be persistent while employment drops, creating stagflation. 

While it’s too early to say whether we face this crisis, investors might want to consider a safety net. Usually, an energy company with robust earnings and room for reinvestment is a good play under such circumstances. This is why midstream energy provider AltaGas should be on your radar for 2022. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends ALTAGAS LTD.

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