With the constant drumbeat of unsettling financial news, it’s easy for investors to become fixated on short-term events. Will the U.S.-China trade war derail the bull market? Will interest rates rise? Have corporate profits peaked?
These are all great questions, but focusing too much on the short run can do an investor more harm than good. Not only will it crank up your anxiety levels, but it could lead you to sell perfectly good stocks in an attempt to avoid whatever financial bogeyman you fear is hiding around the next corner.
A less stressful – and more profitable – approach is to buy solid companies and hold them through good times and bad. Case in point: Algonquin Power & Utilities Corp. (AQN).
I’ve owned Algonquin for years personally and also hold it in my model Yield Hog Dividend Growth Portfolio. The stock’s performance offers an excellent illustration of how time, dividend growth and compounding – not trading in and out based on headlines – are an investor’s most potent weapons.
Let’s rewind the clock to December, 2012, when I first wrote about Algonquin. Back then, the shares were trading at $6.66 and the company paid an annualized dividend of 31 cents a share, for a yield of about 4.7 per cent.
Over the next several months the stock rose, but it skidded in 2013 when bond yields jumped and a research firm slapped a “sell” rating on the shares. Still, I stayed the course because, as I wrote in November of that year, “I believe nothing has fundamentally changed in the company’s 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.”
More drama arrived in 2015 when Algonquin delayed its fourth-quarter results amid what it called “anonymous, unproven allegations” relating to its financial reporting. Nothing came of those allegations, however, and the stock once again recovered.
Even as its stock price was bouncing around, Algonquin forged ahead with its expansion strategy and continued to raise its dividend regularly. Since my first column appeared, Algonquin has hiked its dividend seven times, including a 10-per-cent increase announced last week. The company now pays 56.4 US cents a share annually, up from 31 cents (Canadian) in 2012 – an increase of 145 per cent based on the current exchange rate. (Algonquin began declaring dividends in U.S. dollars in 2014 to reflect its growing U.S. presence, but the dividend still qualifies for the Canadian dividend tax credit.)
Algonquin’s shares, which closed Tuesday at $15.27 on the Toronto Stock Exchange, have also more than doubled since I first wrote about the company. For an investor who simply bought and held the shares through that period, the total return – including dividends – was 179 per cent, or 17.4 per cent on an annualized basis. With dividends reinvested, the annualized return was 19.5 per cent.
That’s all great, you say, but what about the future?
Algonquin, whose shares currently yield about 5 per cent, has long been a favourite of analysts, and nothing has changed in that regard. Seven of the 13 analysts who follow the company rate the stock a buy, with six holds and no sells. The average 12-month price target is US$11.68, or about $15.74 (Canadian).
“In our view, AQN remains the most well-balanced investment option in the sector,” analyst Jeremy Rosenfield of Industrial Alliance Securities said in a recent note. He cited the company’s diversified portfolio of regulated utilities and non-regulated power assets, expected growth of 8 per cent to 10 per cent in earnings per share annually through 2023, projected dividend growth of 10 per cent annually through 2021 and opportunities to invest internationally through deals announced last year with Abengoa SA and Atlantica Yield PLC.
Another reason to like the stock is that Algonquin’s senior management team will likely be sticking around for a while. In response to a question on the first-quarter conference call about Algonquin’s succession planning, chief executive officer Ian Robertson, 59, said the company has a process in place to prepare for a “smooth and measured and thoughtful” transition when the time comes. But he and other senior executives are “not going anywhere in the near term. So hopefully that provides some comfort,” he said.
Every investment comes with risks, and Algonquin is no exception. Rising interest rates, adverse regulatory decisions or a botched acquisition, for example, could put pressure on the share price. But Algonquin has faced short-term adversity before and always bounced back. With a stock like this, it pays to ignore short-term noise and focus on the long term.