Long-term security is the key to this Canadian stock’s successful acquisition strategy.
The company buys profitable utilities that can make immediate contributions to revenue, like the Missouri-based electric utility it bought a year ago. Plus, it sells clean energy through long-term guaranteed government contracts. Its shares currently yield 4.6% and trade at a low 9 times forecast cash flow for 2018.
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ALGONQUIN POWER & UTILITIES CORP. (Toronto symbol AQN; www.algonquinpower) operates through two main businesses: The Generation Group produces and sells electricity from 35 clean energy facilities across North America; and the Distribution Group provides regulated electricity, natural gas, water distribution and wastewater collection services.
In January 2017, Algonquin paid $3.4 billion for Missouri-based Empire District Electric. That firm serves over 218,000 customers through eight power plants. Together, they produce 1,326 megawatts of generating capacity.
In the quarter ended December 31, 2017, Empire pushed up Algonquin’s revenue by 68.7%, to $523.4 million from $310.2 million a year earlier. Overall cash flow rose 65.0%, to $159.1 million from $96.4 million. Due to more shares outstanding, cash flow per share gained 11.4%, to $0.39 from $0.35.
In addition, Algonquin has now finalized its joint venture with Abengoa, S.A., a Spanish company that builds and operates energy generation plants. Together, the partners will develop clean-energy and water-infrastructure assets.
Energy stocks: Stake in 22 power facilities part of Abengoa agreement
As part of their agreement, Algonquin paid Abengoa $608 million U.S. for a 25% stake in Atlantica Yield plc (Nasdaq symbol ABY). Atlantica owns 22 power facilities in North and South America. It also owns 1,770 kilometres of transmission lines and two water desalination plants.
Algonquin recently sold 43.5 million shares at $13.25 a share (for a total of $576 million) to help finance the deal.
Growth by acquisition adds risk. But the company cuts that risk by buying profitable utilities. Its renewable energy projects also sell power under long-term government-guaranteed contracts, which further cuts its risk.
The company last raised its dividend in January 2017. Investors receive quarterly payments of $0.1165 U.S. a share, up 10.0% from the previous $0.1059 U.S. The annual rate of $0.466 U.S. yields a high 4.6%. The company’s dividend has increased an average of 13.5% annually over the last 5 years.
The stock trades at 9.0 times Algonquin’s forecast 2018 cash flow of $1.43 a share.
Recommendation in Canadian Wealth Advisor: Algonquin Power is a buy.
Hi Scott,
Thanks for the recommendation.
MSN.com in its financial section, lists free cash flow for AQN. It’s usually a negative number, which is why I’ve always been leery of investing in AQN. Will you please comment on that?
Here’s the webpage I’m referring to: https://www.msn.com/en-us/money/stockdetails/financials/fi-127.1.AQN.TSE.
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Hi Scott,
Thanks for the recommendation.
MSN.com in its financial section, lists free cash flow for AQN. It’s usually a negative number, which is why I’ve always been leery of investing in AQN. Will you please comment on that?
Here’s the webpage I’m referring to: https://www.msn.com/en-us/money/stockdetails/financials/fi-127.1.AQN.TSE.