Don’t Be Spooked By This Big Dividend

This first appeared as 1 of 3 top Canadian dividend ideas for October 2017 in the Seeking Alpha Marketplace service DGI Across North America.

Altagas’s (TSX:ALA) share price surely looks like it’s turning around after management hiked its dividend for December. Specifically, the dividend increase was nearly 4.3%. That doesn’t sound much until you hear that the company now offers a ~7.5% yield.

Don’t be spooked by Altagas’s big yield, though.

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Is Altagas’s Dividend Safe?

The company is working on a big acquisition, which requires lots of resources. It also plans to sell some of its assets to fund the acquisition. By investing in internal projects, at least some of the lost cash flow will be replenished.

Altagas is devoted to paying out 50-60% of its cash flow as the dividend. Moreover, the dividend is largely backed by long-term contracted cash flow. Altagas’s investment-grade balance sheet also helps.

Altogether, Altagas should be able to maintain its dividend.

What Weighed on the Shares Before?

Altagas’s pending acquisition of WGL Holdings (NYSE:WGL) has been weighing on the shares. The company had to raise funds through essentially an equity offering (via the subscription receipts [TSX:ALA.R]), borrow more money (e.g. its recent note offerings), and the company even plans to sell some of its assets.

The WGL acquisition is supposed to close in mid-2018. If the acquisition falls through, receipt holders will be paid C$31 per receipt. This is a 6.4% upside from Monday’s closing price of C$29.12.

In the meantime, the receipts offer the same dividend-equivalent payment as the common shares (except that the payment is from interest or return of capital, which are taxed differently from dividends).

I think there’s lower risk in owning the ALA.R than ALA. However, the company should do alright in the long run due to its diversified business that’s focused on generating stable cash flow. Moreover, Altagas also invests in internal projects. So, it’s not like it’s just betting on WGL.

Some investors were also worried that Altagas might cut its dividend with all the resources that is required to fund the acquisition. Since the management just did the opposite, some of the worries have gone away.

Technically

Altagas technical chart for October 2017

Altagas’s technical chart is looking less scary. The stock bounced off from the 400-day simple moving average in August, which was when I added to my shares, and it has headed higher since.

Investor Takeaway

Altagas is still a relatively cheap investment for income and its long-term growth prospects. It is a diversified company of utility, power-generation, and midstream assets that generate stable cash flow. Here’s a more indepth article on Altagas that I recently published.

The Street consensus thinks the stock should be worth C$32.70 12-months from now. So, a total return of ~19% is possible (which includes the rich 7.5% yield).

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Disclosure: At the time of writing, I’m long on the TSX: ALA.

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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