Wednesday, May 27, 2009

AltaGas Income Trust

I am reviewing this stock (TSX-ALA.UN) today as it is on my dividend lists and I was looking for something to buy. This stock is on the Dividend Achievers list at www.dividendachievers.com, and the Dividend Aristocrats list at www.tmxmoney.com/en/individual.html (see indices). These list show stocks that have had great dividend increases over the last little while. The 5 year average for this stock is 41% annually.

However, there was a huge dividend increase when this stock became an Income Trust in 2004. The last 3 year dividend increases averages just under 3%. I do not know what the increase will be for 2009 as they generally do their increases in August each year. Because of the increase last year, so far there will 1.7% more dividends this year than last.

The other thing on this stock is that the company has not declared what will happen to the dividend when they switch back to a corporation. Some companies could cut their dividends. Others might keep their dividend at the same amount for the next few years. However, the current yield is above 13%, so you can make some good dividend income currently and in the new few years.

This stock has had good growth in Revenues, Earnings, Dividends, and Stock Prices, over the last 5 and 10 years. The growth in Cash Flow and Book Value has also not been bad. The one thing to mention in the revenue growth is that although the revenue has grown well, the revenue per unit has actually declined for both the last 5 and 10 year periods.

This stock has a fairly strong balance sheet. The Liquidity Ratio is 1.12 and the Asset/Liability ratio is 1.79. The liquidity ratio means that the current assets can cover the current liabilities. The Return on Equity (ROE) has been holding up quite well. The ROE for 2008 was 17% and this is slightly lower than the 5 year average of 18%. The Accrual Ratio is a bit worrisome at 18%. One of the interpretations of high accrual ratios is that the earnings can be lacking in quality.

I have taken a small position in this stock. Now I plan to wait and see how things go with this stock.

AltaGas operates physical assets and provides essential services to customers who produce and consume natural gas and power. Their gas business provides gathering, processing, transportation, storage and marketing of natural gas and natural gas liquids. Their power business generates and delivers power in Alberta and British Columbia and is developing a significant portfolio of renewable power projects. Its web site is www.altagas.ca. See my spreadsheet at www.spbrunner.com/stocks/ala.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at www.spbrunner.com/stocks.html for a list of the stocks for which I have put up spreadsheets.

1 comment:

  1. I own this stock too actually and have been trying to decide whether or not I should be buying more of it, or selling it. I came to the conclusion I should be selling.

    I was seduced by the yield too and am impressed with the stability of the co's earnings stability. But there are a couple of things which concern me.

    1) The very large increase in accruals in 2008. Asset turnovers fell quite significantly, primarily PPE turnover and this coincided with a steep drop in depreciation relative to both investment cashflow, and PPE. To give them the benefit of the doubt, they had the Taylor aquisition which might have thrown out some of the historical comparisons. But it's important to see it also as a possible warning flag. Under depreciating assets in order to flatter earnings today is a hefty restructuring charge tomorrow.

    2) In Q109 they maintained net income/sh relative to Q108 only because they made an adjustment to the "estimated liabilities related to gas purchases." Again, I want to give them the benefit of the doubt and I haven't spoke to the co yet about this estimate change. But it is another warning flag hinting at earnings management.

    Besides, for me the current valuation doesn't really justify the risk. Backing out from the capitalised value-added I think the price probably implies about a 12% long-term total return here, which is good, but not as good as some other opportunities out there.

    ReplyDelete