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yield hog

With investing, patience can be a virtue.

Case in point: Algonquin Power & Utilities Corp.

When I last profiled the company in November, 2013, the shares had plunged about 20 per cent from their peak and were trading at $6.72. Investors were nervous about the possibility of rising interest rates and were also rattled by a "sell" rating that an independent research firm had slapped on the company.

But I vowed to hold onto my shares, noting that – despite the negative investor sentiment and sinking share price – nothing had fundamentally changed in the outlook.

"Algonquin remains a company with good growth potential, a rising and sustainable dividend … and a relatively low-risk business model supported by stable cash flows from its regulated utilities and contracted power generation assets," I wrote.

Staying the course turned out to be the right call. Since that column appeared, Algonquin's shares have rebounded to new highs, producing a total return – assuming all dividends were reinvested – of about 46 per cent. The shares closed on Tuesday at $9.61 on the Toronto Stock Exchange.

The bounce in Algonquin's stock price underscores a key lesson for investors: As long as the long-term outlook remains favourable, there's no reason to get bent out of shape by short-term volatility in a company's share price. My only regret is that I didn't buy more Algonquin shares at the time, but I was already comfortable with the stock's weighting in my portfolio.

Here are four reasons that I continue to like the company.

It's conservative

As its name suggests, Algonquin Power & Utilities operates two distinct businesses. Its Algonquin Power subsidiary produces electricity from wind, solar, hydroelectric and thermal generating facilities in Canada and the United States, and its Liberty Utilities division distributes water, electricity and natural gas to communities in about 10 U.S. states. People need to turn on their lights, heat their homes and quench their thirst, so there's always demand for what the company provides. What's more, earnings are generally stable and predictable, because most of the power output is contracted on a long-term basis and the utilities are regulated.

Dividend is solid and rising

In August, Algonquin raised its annualized dividend to 35 cents (U.S.) from 34 cents (Canadian) – an increase of 12.4 per cent based on the exchange rate at the time. (The switch to paying its dividend in U.S. currency reflects the fact that a majority of Algonquin's cash flow now comes from the United States). It was Algonquin's fifth dividend increase in 3 1/2 years, and there are almost certainly more to come: At Algonquin's annual investor day in November, chief executive officer Ian Robertson spoke of "high single-digit, low double-digit growth in dividends" – and similar growth in earnings and cash flow. For a stock that yields about 4.2 per cent, based on the current Canada-U.S. exchange rate, that sort of projected dividend growth is attractive.

The payout ratio is manageable

Algonquin has historically paid out more in dividends than it makes in net earnings, but the gap has closed recently. However, the dividend is easily covered by Algonquin's cash flow. "Free cash flow is a tremendous tool that we have and, I think, one that really differentiates us from our peers here in Canada and in the U.S.," chief financial officer David Bronicheski said during the investor conference. "We are really only paying out about a third to 40 per cent of our cash flow as a dividend. And so that really allows for significant reinvestment of free cash into our business." It also makes the dividend extremely safe.

There is a lot of growth ahead

Algonquin has about $2.8-billion in growth projects that it expects will drive annualized increases of about 18 per cent in earnings before interest, taxes, depreciation and amortization (EBITDA) between now and 2018. These include investments in wind and solar power generation, a stake of up to 10 per cent in a new Kinder Morgan natural gas transmission pipeline in the U.S. Northeast, and the recent acquisition of Park Water, which owns three regulated water utilities in Southern California and Western Montana. Algonquin is also exploring other gas and electricity transmission opportunities.

"The company's large, low-risk investment program should drive strong earnings growth over the next several years," said CIBC World Markets analyst Paul Lechem, who has a rating of "sector outperformer" and a 12- to 18-month price target of $10.50 on the shares. RBC Dominion Securities analyst Nelson Ng is even more optimistic: Following the investor conference he raised his price target to $11 from $10 "to reflect our view that the company will deliver industry-leading growth rates over the medium term."

Closing thoughts

The stock isn't without risks. If bond yields rise significantly, shares of Algonquin and other interest-sensitive stocks could take a hit. According to CIBC's Mr. Lechem, there are also risks associated with climate conditions (for renewable energy producers in general), permitting and construction of projects, regulatory decisions, foreign exchange fluctuations and subsidies for renewable power generation. But Algonquin's growing earnings and dividends, and the essential nature of its infrastructure businesses, should support the stock in the long run.

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Algonquin Power