Should You Buy AltaGas Stock for its 4% Dividend Yield?

AltaGas stock is down 49% from all-time highs and has trailed the broader markets in the past decade. Is the TSX dividend stock a buy now?

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Shares of AltaGas (TSX:ALA), a Canada-based energy infrastructure company, have trailed the broader markets by a wide margin in the past decade. Since September 2013, AltaGas stock has returned 32% after accounting for dividends. Comparatively, the TSX Index has surged 125% in the last 10 years.

Currently trading 49% below all-time highs, the TSX stock offers investors a tasty dividend yield of 4%. Let’s see if it can enhance shareholder wealth via capital gains, too, in 2023 and beyond.

Is AltaGas stock a buy, sell, or hold?

AltaGas has two primary business segments, which include midstream and utilities. Its midstream business consists of export facilities as well as processing, fractionation, and logistics infrastructure, in addition to hydrocarbon storage. The company basically connects North American energy producers from wellhead to offshore export and domestic markets.

Its regulated natural gas utilities business serves 1.7 million residential, commercial, and industrial customers in four states in the United States. The business also has interests in natural gas storage facilities.

Valued at a market cap of $7.67 billion, AltaGas has over $20 billion in assets. It owns and operates high-quality, long-life energy infrastructure and utility assets underpinned by robust fundamentals. Moreover, 75% of the company’s EBITDA (earnings before interest, tax, depreciation, and amortization) is backed by long-term contracts, providing it with stable cash flow and earnings.

AltaGas emphasized it is focused on assessing economic trends impacting its business and seeks to generate value for investors. Its expanding North American natural gas supply and natural gas liquids demand provide opportunities for capital investments, driving future cash flows higher.

What’s next for AltaGas stock price and investors?

Last week, AltaGas disclosed it entered an agreement to acquire critical gas processing and storage infrastructure in the Pipestone area from Tidewater Midstream. The acquisition of these assets should strengthen the midstream value chain while providing LPG supply for global exports.

The acquisition was valued at $650 million, which consists of a cash consideration of $325 million and an issuance of 12.5 million shares of AltaGas priced at $26.07. The transaction indicates the deal is priced at 7.2 times the estimated run-rate normalized EBITDA.

AltaGas expects the acquisition to support its strategy of adding long-life infrastructure assets with meaningful financial accretion. These assets should boost the company’s footprint in Alberta and expand its midstream customer base with independent producers.

It also reduces commodity price risk as take-or-pay and fee-for-service revenue will increase by another 6%. Additionally, the deal, once completed, will diversify the customer base for AltaGas with multiple investment-grade customers.

Is ALA stock undervalued?

AltaGas is forecast to increase adjusted earnings from $1.87 per share in 2022 to $2.06 per share in 2024. So, the TSX stock is priced at 13.2 times forward earnings, which is quite reasonable given its tasty dividend yield.

The company pays shareholders a quarterly dividend of $0.28 per share and ended the second quarter with a normalized funds from operations per share of $0.52. So, its payout ratio stands at less than 55%, giving it enough room to increase dividends, reinvest in capital projects, and lower balance sheet debt. In the last 10 years, AltaGas has increased dividends by 8.8% annually.

AltaGas stock trades at a discount of 15.8% to consensus price target estimates. After adjusting for its dividends, total returns will be closer to 20% in the next 12 months.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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