RE:Utilites are Supposed To Be Safe HavensDeanEdmonton wrote: Utilites are desbribed as Dividend plays, widows and orphan funds and on it goes. ALA, Trans Altaa Renewables, before it and now this have proven that bad leadership and stupid BoDs can mess up even a stable company like a utility stock. Managment is EVERYHTING no matter what the induustry or company. The entire leadership of this company and the Board need to go, Full Stop.
I think they are different stories. Trans Alta is mostly power production, with little regulated business. Altagas is about 50% midstream and 50% regulated utilities. Algonquin is mostly regulated utilities (75%+).
The regulated utilities portion is a long term, almost 100% guaranteed source of earnings. Yearly earnings will vary due to timing delays. Real return also lags long term interest changes. However, in the end, return on capital on invested money in the regulated utility is almost certain.
The funniest thing about Altagas is that even though I would agree the new CEO did a better overall job than the previous one, the revenues and margins pretty much all come from WGL and Ripet, which were both investment decisions of the "maligned" leadership. Also, Altagas adjusted ebitda and cashflows were relatively stable through the large variation of the share price (from largely overpriced at $50+ to largely underpriced at $10), so it is arguable that the fluctuations in the share price were just mispricings by the market and not related to the "real" business side, which was pretty steady in terms of results. I think that, mostly, the new CEO favored a better capital allocation (less money going out of the business in dividends, more money staying in the business to increase future returns) than the previous one.
In the case of Algonquin, it's not like the wheels are falling off either. The regulated business has seen recent reinvestments which has increased and will increase the return for the shareholders. The non-regulated, renewables portion of the business had one weak quarter due to wind conditions and delays in project startups. Sure, the corporate non-regulated variable rate debt has increased costs, but much less than what was seen in Q3, as those extra interest charges included regulated business interests that will be put into rates eventually. Heck, despite the increased interest rates and the extra corporate debt, their acquisition of Kentucky Power will still increase their annual cashflow. Should they look at their capital allocation (reduce the dividend to increase reinvestments into the business)? Due to the current share price which restricts their ability to get capital on the market at accretive rates for the investors, maybe they should.
The question about the dividend is often not looked at correctly. When a company (like Algonquin) generates positive cashflow from operations, they need to decide how they will use that extra money. The choice is to reinvest in the business or to return cash to the shareholders. In Q3, about 55% of the cashflow from operations went back to investors in the form of a dividend (excluding drip), with another 45% going in the business (working capital, paying debt or investing in assets).
To summarize... are utilities safe havens? Indeed, they are if you are looking at long term returns. However, publicly traded companies, including utilities, can see unfair variations of their share price (upwards and downwards) which do not reflect the ability of the company to provide long term returns. If you were to compare Algonquin's share price to long term adjusted ebitda and cashflow generation, you would find that it is discounted by more than 50%. Can it get more discounted? Sure, you never know with the market, since it's based on perception much more than fundamentals, especially in the short term (ie: Altagas was severely and unfairly discounted for over a year).