Power and utilities stocks are typically seen as conservative plays that provide stable income, but not a lot of growth.
For the past few years, however, Algonquin Power & Utilities Corp. investors have been getting the best of both worlds.
Since the former income trust slashed its distribution in October, 2008, in preparation for becoming a growth-oriented corporation, the shares – which had been cut in half on the news – have come roaring back.
The total return over that period has been a sizzling 191.5 per cent, including dividends, or about 29.3 per cent annually.
Algonquin has raised its dividend three times and more increases are likely, analysts say.
“We view [Algonquin] as the most attractive diversified power and utility infrastructure growth play in our coverage universe,” Desjardins Capital Markets analyst Jeremy Rosenfield said in a recent note. “The outlook for [the company] remains very strong.”
Most analysts are bullish, with 12 having “buy” recommendations, one rating the stock “hold” and one “sell.”
That’s not to say such outsized gains will continue. Back in 2008, the stock had been beaten down to bargain levels as income investors fled following the distribution cut, setting the shares up for a strong rebound. Returns going forward will almost certainly be more muted.
That said, if you’re looking for a relatively low-risk stock with a solid yield (currently 4.7 per cent), good growth prospects and a “green” halo to boot, Algonquin Power & Utilities is worth investigating. (Disclosure: I personally own the shares).
As the name implies, Algonquin is really two companies in one. Its Algonquin Power subsidiary focuses on renewable electricity generation through direct or indirect interests in 20 hydroelectric facilities, five wind farms and seven thermal plants fuelled by natural gas, solid waste and biomass. The company’s first solar plant, near Cornwall, Ont., is expected to be in service toward the end of 2013. The power assets are split about 50-50 between Canada and the United States.
Algonquin’s other subsidiary is Liberty Utilities, which provides water, gas or electricity to about 330,000 customers in seven U.S. states – Arizona, California, Illinois, Iowa, Missouri, New Hampshire and Texas – with plans to expand into Georgia and Arkansas next year.
The combination of regulated utility operations with generating facilities governed by long-term power purchase agreements (PPAs) – the average duration of which is 13 years – means Algonquin’s earnings are insulated to an extent from economic swings. Including development projects in the pipeline, the average PPA life is expected to increase to 17 years by about 2017.
On the growth side, the company is three years into a five-year plan to double its asset base, principally by acquiring regional U.S. utilities and building or buying power generating sites on both sides of the border.
“Over the next several years, the company’s growth profile remains robust,” Canaccord Genuity analyst Juan Plessis wrote in a recent note.
“Its current slate of growth projects and acquisitions total $1.3-billion, and should management continue to deliver on its plans, we expect earnings as well as dividends to grow at a strong pace.”
In an interview, Algonquin’s chief executive officer Ian Robertson said dividend growth of between 5 and 10 per cent annually is a reasonable expectation, given the company’s expansion program.
Although utilities and contracted power generation are relatively steady businesses, the stock is not without risks.
“With growth itself comes risk, and I think you need to be very mindful of the fact that growth unto itself kind of stresses an organization,” Mr. Robertson said. “Given that growth is part of our DNA, it is part of what we are trying to deliver to shareholders … we have very much built a management structure whose core competency is managing that growth.”
Another risk for investors is rising interest rates, which could have a negative impact on the shares. After the stock’s sizable move already, valuation is also a concern for at least one analyst.
“We believe [Algonquin] will continue to deliver EBITDA [earnings before interest, taxes, depreciation and amortization] and dividend growth, though we remain neutral on the stock as we believe it may need to grow into its valuation over the coming quarters,” wrote National Bank Financial analyst Rupert Merer.
He has a “sector perform” rating and $6.75 target on the stock.