Algonquin Power: U.S. Dollar Dividend, Canadian Dollar Share Price, And Huge Insider Ownership
Algonquin Power is getting lots of love from Canadian stock analysts. It has a unique structure of paying its dividend in US Dollars, removing foreign exchange risk for income investors. Insiders own 19% of the company. Algonquin Power and Utilities ( OTCPK:AQUNF ) (AQN.TO) is a Canadian-based electric, natural gas, and water utility serving 488,000 customers. US investors are offered an interesting combination of above-average dividend growth paid in US Dollars while gaining exposure to the benefits of a falling US Dollar with a company well liked by Canadian research analysts. Management expects 15% growth in assets, approximately 15% growth in adjusted EBITDA and greater than 10% growth in adjusted EPS. In Canada, the majority of assets are in renewable power generation while its US footprint is strong to utility distribution with 31 electric, gas, and water businesses. Algonquin Power’s cross-border structure provides an interesting twist for US investors: Income is paid in US Dollars and share prices trade in Canadian Dollars. While dividend growth investors may turn their heads at a huge dividend cut in 2009, an understanding of the company’s structure should overcome this stigma. Water will be a bigger part of Algonquin Power. AQUNF is working on acquiring the water utility assets of private equity firm Carlisle Infrastructure Group LLC. After the acquisition of California and Montana based Park Water is complete, Liberty Utilities will be the 6th largest US water utility by customer count. However, two municipalities, Missoula, MT and Apple Valley, CA are trying to purchase their respective water districts and have been aggressive in filing court documents seeking to force these businesses back into the public domain. Until these issues are resolved, the acquisition cannot proceed. The company recently expanded its Distribution footprint into New England with the purchase of New Hampshire’s Granite State Electric Company and Energy North Natural Gas. In addition, Algonquin Power announced its participation in the Northeast Energy Direct project, a $5 billion natural gas pipeline project that will connect Marcellus production to the Northeast. Algonquin Power went public during the Unit Trust craze in Canada and converted to a C corp. when the Canadian government clamped down on its abuses. In the conversion process, AQUNF cut its dividend in 2009 by 74%, but has been raising dividends since then. The current 5-year dividend growth rate stands at 15.5%. The dividend was most recently increased last June by 10.3%. Based on a $7.70 price for AQUNF (C$10.31 for AQN.TO) and a $0.384 dividend, the current yield is 4.98%. Algonquin Power is expected to earn C$0.43 this year and C$0.50 next. This is slightly less than its dividend, creating a payout ratio of over 100%, but the firm’s trends are positive. Based on its most recent 5-year, $4 billion capital expansion plan, the company is targeting growth in assets and EBITDA of 15% CAGR, EPS and cash flow growth of 7-10% CAGR, and 10% dividend growth rate. More information on its capital plans can be found in its most recent Investor’s Day Presentation pdf. Below is a graph of past and expected EPS, in Canadian Dollars. Source: S&P Algonquin Power is getting lots of love from Canadian stock analysts. For example, BMO Research (Bank of Montreal) recently issued a review reiterating its Outperform rating: Algonquin Power saw its target price increased to C$12.50 from C$11.50 at BMO Research, following an investor day it hosted on December 1. The broker reiterated its outperform view. BMO said Algonquin remains one of its best ideas in power and utility. It also noted that Algonquin is now comprehensively viewing its business from a horizontal and vertical lens to broaden and capture additional growth opportunities. Clear is that this strategy has been successful and expanded its secured opportunity set and provide further support to the 10% dividend growth guidance through 2020, the broker added. BMO increased its EPS estimate to C$0.52 for 2016 while reducing its 2017 forecast to C$0.59. The 2015 outlook remains at C$0.43. BMO is not the only broker who likes Algonquin Power. From Dakota Financial News : A number of other brokerages also recently commented on AQN. RBC Capital lifted their price target on shares of Algonquin Power & Utilities Corp from C$11.00 to C$12.00 and gave the company an “outperform” rating in a research report on Thursday. TD Securities lifted their price objective on Algonquin Power & Utilities Corp from C$11.00 to C$11.50 and gave the stock a “buy” rating in a research report on Monday, November 9th. Scotiabank lifted their target price on shares of Algonquin Power & Utilities Corp from C$11.00 to C$12.00 and gave the stock a “sector perform” rating in a research note on Monday, November 9th. CIBC boosted their price objective on shares of Algonquin Power & Utilities Corp from C$6.50 to C$7.00 and gave the company a “sector outperform” rating in a research note on Thursday, November 26th. Finally, Macquarie began coverage on shares of Algonquin Power & Utilities Corp in a report on Thursday, November 26th. They set an “outperform” rating on the stock. As most international investors know, the sharp spike in the value of the US Dollar has hurt the valuation of its holdings when converted back into USD. For example, the 26% decline in the value of the Canadian Dollar has caused a decrease in dividends paid in Canadian dollars by Canadian firms. When both were at parity, a $1 in Canadian dividends was worth $1.00 in USD. However, currently the same Canadian dollar would translate into $0.734 in USD. Algonquin Power’s unique dividend policy is to pay its dividend in USD for US investors as to make the income portion of an investor’s total return unaffected by the trials and tribulations of the international foreign exchange market. Algonquin Power is able to do this because 80% of its EBITDA is generated in the US and is paid to the company in US Dollars. This attribute should be both a comfort and an advantage to income investors. On the share price side of total return lies an interesting opportunity. If you believe the USD is overvalued compared to the Canadian Dollar, investing in Canadian-listed stocks could provide an interesting boost in potential capital gains. Below is a chart of the US-listed AQUNF (black line) and the Toronto-listed AQN.TO (gold line): The major difference is the slide in the exchange rate starting in Nov. 2013. Over time, if the current exchange rate moves back to parity, share prices should respond positively. However, in the short term, as the US Fed begins to raise rates while the Canadian Central Bank either loosens or maintains its low rates to combat its current commodity-generated economic weakness, the move towards higher exchange rates will favor the US rather than Canada. Insider ownership is substantially larger than most utilities. From Algonquin Power’s tear sheet pdf, insiders own 19.6% of the outstanding stock. Regardless of industrial sector, this level of insider ownership usually connects the retail investor and management at the hip, and should be viewed as a positive attribute. Over the medium term, Algonquin Power should continue to increase its US assets through expansion of alternative power generation and acquisition of smaller US utilities, almost in a roll-up type process. Management’s growing customer base covers the major types of utilities in electric, natural gas, and water services. This allows the company to review opportunities over multiple sub-sectors of the utility sector. Although a cursory review of its dividend history could prove unsettling, I would consider the current dividend supported by management’s growth plan as being a reliable source of income. Investors looking for comfortable utility dividend income and a play on both above-average industry growth and a rebound of the Canadian Dollar over time should review AQUNF. Previous articles on Algonquin Power can be found from Oct. 2014 and March 2015 . I have been long AQUNF since Sept. 2010. Author’s Note: Please review disclosure in Author’s profile. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.