Thursday, March 11, 2010

AltaGas Income Trust 2

I bought this stock (TSX-ALA.UN) in February of 2009 after reviewing it, as it was on the dividend lists that I follow. I purchases more in November 2009 with the money I got from selling EnCana. Since buying this stock, I have made a return of 26% per year. I got the stock for a reasonable, but not great price. Note that this company is changing to a corporation in mid-2010 and they will cut their dividend.

The first thing I like to look at is Insider Buying and Insider Selling. It is interesting that there is quite a bit of insider buying (over $4M in the past year), with no insider selling, but analysts are negative on this stock. Most think that earnings for 2010 and 2011 will just go down. So, what do the insiders feel or know about this company that the analyst cannot see? The company says their objective is to build a portfolio of energy assets and services that are capable of generating long-term, stable cash flow.

Now, I will go on to talk about the ratios. First, the P/E ratio I get for 2010 is 12.3. The 5 year average low P/E is 9.9 and the 5 year average high is 12.2. The problem is that earnings (and cash flow) are expected to go down in 2010 and 2011. The trailing P/E is a more reasonable 10.3. For the Price/Book Value Ratio, I get a current one of 1.38. This is about 73% of the long term average of 1.89. This ratio’s value points to a good current price. The value of the Price/Book Value ratio is that it is based on current values, not on estimates.

The next thing I want to talk about is the Graham Price. This is an attempt to come up with what the shares (and therefore), the company is worth. For the end of 2009, I get a Graham Price of $22.94. The Graham Price goes down in 2010 and 2011 to $21.20 and $18.15 respectively. This is because earnings are expected to go down. In their annual report, this company admits that earnings in 2010 will be lower than for 2009. The theory is that you buy stocks that are close to or at the Graham Price and you will prosper in the investment.

The last thing to look at is yield. The distributions for 2010 are expected to be set at the new rate in mid 2010. Even with this, the yield on this stock for 2010 will be 9.7% compared to a 5 year average of 9.3%. This shows a relatively good current price. However, when the full effect of the dividend decrease occurs in 2011, the yield, at the current price will only be 7.6%.

When I look at analysts recommendations, I find that they range from Strong Buy to Buy to Hold. I also find one Sell recommendations. The consensus recommendation appears to be a Hold. (See my site for information on analyst ratings.) The main problem seems to be that the analysts do not see the share price of this stock increasing in the near future. The analysts that like this stock seem to like the dividends that it pays.

I plan to holding on to the shares I have. I am interested in dividends, so having good dividend payments while you wait for some capital gains is a good idea for me. For me, the dividend return is why I will continue to hold my shares. I bought my shares for just under $18, so I find the current price reasonable. I also find it encouraging that insiders are buying.

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 See my spreadsheet at .

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 for a list of the stocks for which I have put up spreadsheets. Also, look at other investing notes on my website at Follow me on twitter.

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