How to Invest Against Central Bank Headwinds
RBC’s Stu Kedwell and Sarah Neilson look for these types of value stocks – and why the next six to 12 months will be telling for the economy.
Another favourite is Altagas Ltd. (ALA), a Calgary-based energy infrastructure firm that operates a natural gas distribution network in the U.S. and a midstream energy business in Western Canada. “We built a position in 2018 when things were going wrong for the company and the market really reflected that,” says Neilson. “Back then they had closed a large utility acquisition that burdened the company with a significant amount of debt and financing requirements that the market anticipated would hinder their dividend payout ability, and possibly require a massive equity need. The share price was severely punished and went down to about $15 [in late 2018] near where we entered the stock.”
Yet despite market pessimism, Neilson had faith in the company. “We saw a path through a management change, and a dividend right-sizing, that would help improve its position, both financially and in the market.” Indeed, a new management team is in place and with a focus on capital allocation, it has reduced the firm’s debt. “As they got through this period, increasing value accrued to shareholders.” Today, the share price has doubled to $30.
Looking ahead, Neilson and her team believe that Altagas’s utility business rate base growth may be about 8-10%, while the midstream business will benefit from increasing natural gas production, as the industry develops liquefied natural gas capacity. “On top of steady earnings growth and dividend growth of 5-7%, there could be some re-evaluation upside from there, which should be reflected in an increased share price.”