Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) consists of diversified regulated utilities across natural gas, electric, and water utilities, and non-regulated renewable energy across wind, solar, hydro, and thermal generation. Its renewable and clean energy facilities are mostly under long-term contracts (averaging about 13 years) with inflation escalations.
Regulated utility Fortis (TSX:FTS)(NYSE:FTS) has a long dividend-growth streak. It has 48 consecutive years of dividend increases, which is the second-longest streak on the TSX. Because of the transition to net-zero emissions, renewable and clean energy are good places to consider investing in. Algonquin offers the best of both worlds in having regulated utilities and a renewable portfolio.
A dividend stock with a high yield
The dividend stock provides a relatively high yield of 4.8% today. According to the line of thought used in The Single Best Investment by Lowell Miller, 4.8% is a big yield because it’s 1.88 times that of the stock market yield of 2.55%. Miller thinks a yield that’s 1.5 – 2 times that of the market is high.
Is the utility’s dividend safe?
The key factors that determine a company’s dividend safety are the stability of earnings or cash flow and the payout ratio.
Most utilities that pay a stable dividend have relatively stable earnings or cash flow. Algonquin appears to have this trait as well, as demonstrated in its, say, last five years’ adjusted earnings per share (EPS) shown in the graph below. We’re not too concerned with its more bumpy earnings in the past because the utility has changed a lot, growing larger in the last decade.
What we’re more concerned about is Algonquin’s relatively high payout ratio. This is why we initially thought — probably in 2020 — that the utility should slow down its dividend growth to achieve a more sustainable payout ratio.
So, we conclude that Algonquin’s dividend isn’t as safe as Fortis’s given the latter has a lower payout ratio. Because of AQN’s high payout ratio, dividend increases for AQN aren’t as sure a thing as Fortis’s future dividend raise.
Valuation wise, the 12-month consensus analyst price target suggests a 17% discount in AQN stock today.
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Disclosure: As of writing, we own shares of Algonquin.
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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