Altagas Ltd. (TSX:ALA) is not just a pipeline company. It also has strong utility and power businesses. With its FFO per unit expected to grow this year, its 6% yield should be safe with a payout ratio of below 60%. Priced at under $33, Altagas is priced at a margin of safety of 11-18%. Project opportunities exist through 2020 across all 3 of its businesses. In addition to the cash flow generated from existing assets, new projects going online will also drive growth.
Altagas Ltd.: The business
40% of Altagas’s EBITDA comes from its contracted power operations, 35% comes from its utilities, and 25% comes from its contracted midstream operations. In 2015, 91% of its EBITDA was investment grade, of which 51% was in the A category and 40% was in the BBB category.
Altagas transacts about 2 Bcf/d of natural gas, including processing and moving it to the key markets of North America and Asia. Secondly, the company has the capacity to generate 2,041 MW of power. Lastly, Altagas operates 5 utilities that serve natural gas to more than 560,000 customers (22% in Canada and 78% in the U.S.).
Investors are probably worried about its midstream operations because of low natural gas prices. However, only 4% of its midstream EBITDA (equating to <1% of total EBITDA) is exposed to commodities. That is a low exposure compared to the industry average of 17%. Further, 72% of its gas portfolio is with investment grade counterparties.
In five years, Altagas managed to increase its dividend at an average rate of 8.5% per year. Currently, it pays a monthly dividend of 16.5 cents, totaling an annual payout of $1.98 per share. At under $33, Altagas’s 6% yield should be safe.
This is mainly an excerpt. For a more detailed article, check out Seeking Alpha: Should You Buy Altagas Ltd. For Its 6% Yield?
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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