Thursday, April 7, 2011

AltaGas Ltd 2

I bought this stock (TSX-ALA) in 2009 and some more in 2010. Since I bought this stock at a very good price, I have made a total return of 38% per year. Probably about 10% of this return is in dividend or distributed income.

The Insider Trading report only covers this company since the conversion of the company to a corporation, which is from July 2010 and is not for a full year. According to the Insider Trading report, there has been almost $2M of insider buying, the majority ($1.7M) by the company’s CEO. There has been insider selling of $.5M for a net insider buying of $1.4M. This is a good sign that CEO is buying into the company. He now owns 1.5% of the company. The company has also said that they plan to grow dividends in the future and this is another good sign.

I get a 5 year median low Price/Earnings Ratio of 10.4 and a 5 year median high P/E of 15.13. Because this company’s earnings are expected to drop in 2011, I get a current P/E ratio of 26. The trailing P/E ratio is lower at 21.9. Both these are high. The current one of 26 is not only high relatively, but in absolute terms.

I get a current Graham Price of $18.17. The current stock price of $26.06 is some 43% higher. The 10 year median difference between the Graham Price and the stock price is 30%. So by this standard the current stock price is high.

I get a 10 year median Price/Book Value Ratio of 1.70 and a current one of 1.78. The current one is only 4% higher than the 10 year median P/B Ratio. The current dividend yield is 5.1% and the 5 year median is 9%. However, this is not a fair comparison because the dividends have been recently reduced.

When I looked for analysts’ ratings, I find Strong Buy, Buy, Hold, Underperform and Sell. In other words, the recommendations on this stock are all over the place. The consensus recommendation would a Hold. There is not that many analysts following this stock, but most recommendations are a Buy and Hold. One analyst that recently changed to a Hold said that the stock has reached his 12 month stock price. I find 12 months stock prices at $25 and $26. Another analyst said that the company is fairly well hedged so that gas prices neither help nor hurt them.

The sell analyst did not like the fact that dividends were cut. However, since the company is no longer an Income Trust, they have to bring the distributions down to a manageable portion of the earnings and cash flow. The company can do longer base their distributions on Funds from Operations as Income Trust companies did. This is not the only Income Trust to cut distributions on the change to a corporation and it is a logical response to a change to a corporation. The company plans in the future to start increasing their dividends. However, they have not said when this will happen.

I plant to keep my investment in this company. I realize that on a go forward basis, I will not earning what I have in the past, but I expect a reasonable rate of return. A reasonable rate of return for a dividend paying company is 4% capital gain and 4% dividend income.

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 here Altagas. See my spreadsheet at 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 for stocks followed and investment notes. Follow me on twitter.

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