AltaGas Ltd

I own this stock (TSX-ALA). I first bought this stock in May 2009 and then bought more in November 2009 and in June 2010. I have made a return of 36.5% per year. Dividends count for 8.8% per year of my return or 24% of my return. My capital gain return is 27.7% per year.

This company used to be an income Trust under AltaGas Income Trust (TSX-ALA.UN). I bought it at a good time when the stock was down. A number of income trust companies lowered their dividends because of the change to a corporation. This company decreased their dividend by 39% before it started to increase it again. The dividend is still 36% lower than it was in at its peak in 2009.

Dividend growth over the past 5 years is negative. It has gone down by 7.9% per year over the past 5 years. However, it is up over the past 10 years by 18.9%. Dividends were increased in 2011 by 4.5%. The 5 year median Dividend Payout Ratios are 121% for earnings and 74% for cash flow. DPRs for 2011 were 132% for earnings and 56% for cash flow. The DPRs for earnings is not expected to be below the earnings level until next year (2013).

If you had held the stock for the last 5 and 10 years you would probably have made a return of 10.8% and 25.6% per year. (I did better because I held the stock for less than 3 years.) The dividend portion of the above return was 6.8% and 9.2% per year. Dividends made up 63% and 36% of the return. Capital gains made up 4% and 16.4% per year of the return.

Going forward you should expect the portion of the return attributed to dividends to go down. Income Trusts gave out very high dividend yields. Corporations have much lower dividend yields. The current dividend yield is 4.55%. I would not expect any improvement on this in the future.

Other growth for this company shows that the 10 year growth is better than the 5 year growth. For example revenue growth is down by 6.2% per year over the past 5 years, but up by 3.3% per year over the past 10 years. Cash Flow is down by 3% per year over the past 5 years, but up by 6.5% over the past 10 years. A lot of companies are in this situation because of the recent recession.

As far as debt ratios go, the current Liquidity Ratio is just 0.65. Even talking off the current portion of the debt (which has been handled) the ratio only moves up to 0.79. However, this is typical of this sort of company. The Debt Ratio is much better at 1.62. The current Leverage and Debt/Equity Ratios at 3.05 and 1.88 are fine and typical of this sort of company. (This company can be compared to pipeline companies like Enbridge (TSX-ENB) or Pembina (TSX-PPL).)

The Return on Equity is rather low at 8.1% for 2011. The 5 year median ROE is better at13.5%. The ROE on comprehensive income at 7.4% is close to the ROE on net income.

I will be holding on to my shares. I bought this as a long term investment. However, I expect a lower rate of return in the future. Over the next few years I would expect total return to be between 10 and 15% with dividends making up 4 to 4.5% of the return and capital gain making up 6% to 10.5%.

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.