This week we took the opportunity to buy the dip in Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN). The company reports in USD and pays a USD dividend. So, we’re going to discuss the dividend stock on the NYSE and in USD.
The latest dip was triggered by an equity offering of US$1 billion. The reference price for the equity units is $15.00 per common share.
AQN stock Business Overview
Algonquin consists of two business segments: regulated utilities (natural gas, electric, and water) and non-regulated renewable energy (wind, solar, hydro, and thermal). Its renewable energy portfolio primarily consists of long-term contracts that have inflation escalations. Together, its portfolio allows it to generate stable earnings and cash flow.
Buy the Dip in Renewable Energy Stocks
Year to date, the stock has pulled back along with other renewable utility stocks. Investors can also consider Brookfield Renewable Partners L.P. (TSX:BEP.UN)(NYSE:BEP) and Northland Power (TSX:NPI). However, Algonquin provides the biggest yield of the three. It has also been a little more resilient, likely due to its exposure to regulated utilities that make up about two-thirds of its business.
Brookfield Renewable Partners LP (TSX:BEP.UN)(NYSE:BEP) just increased its cash distribution by 5.1% to an annualized payout of US$2.06 per unit. That implies a yield of 7% at US$29.29 per unit.
A Sustainable Dividend
In 2018, it increased its funds from operations (“FFO”) per unit by nearly 14%, resulting in a payout ratio of <91% for the year, which was a meaningful improvement from 2017’s payout ratio of 98%. The lower payout ratio makes a safer dividend.
Management aims for cash distribution growth of 5-9% per year in the stock. It’s conservative to assume a cash distribution growth rate of 5% because, since 2011, its distribution has compounded at a growth rate of 5.4%.
Brookfield Renewable Energy Partners LP (TSX:BEP.UN)(NYSE:BEP) generates stable cash flows from a predominately hydroelectric portfolio, complemented by wind-power generation. It yields 6.5%, targets long-term total returns of 12-15%, and targets 5-9% distribution growth per year. Its 2015 setbacks were mainly due to hydrology and the strong U.S. dollar. Its recent acquisition of Isagen in Colombia is immediately accretive, and should help drive long-term growth.
Brookfield Renewable is a pure-play renewable energy platform which operates in North America, Latin America, and Europe. It has about $20B of assets, including 207 hydroelectric generating facilities, 37 wind facilities, 3 biomass facilities, and 2 natural gas-fired plants. Its assets have 7,284 MW of generating capacity and annual generation of 25,766 GWh based on long-term averages.
Its portfolio is focused on hydroelectric generation (81%), complemented by wind-power generation (17%). The company generates 50% of cash flows from the U.S., 25% from Canada, 20% from Brazil, and 5% from Europe. About 90% of its cash flows are contracted with a weighted-average remaining duration of 17 years (of which 84% are investment grade clients), which provides long-term cash flow stability.
I particularly like Brookfield Renewable’s value investing mindset. It takes a contrarian view and long-term approach to investing by looking for undervalued opportunities. Read More