Sunday , June 13 2021

Should you buy AltaGas Ltd (TSX: ALA) for high dividend income?

AltaGas (TSX: ALA) is one of the most profitable dividend shares in TSX. With a yield of 6.88%, it can generate up to $ 6,880 in annual earnings if you own $ 100,000 worth of shares. This type of payout is enough to make every investor pour.

But there are catches: AltaGas is an energy stock, and lately energy is very poor. Although West Canadian Select has increased more than twice since November, TSX energy stocks continue to trade near the lowest 12-month levels.

AltaGas is no exception: since it was written, it was priced at $ 14.02, less than $ 29.08 this time last year. This sharp downturn partly explains why the yield of the stock is so high. But does the high yield really justify buying stocks in such a sustained downward trend? To answer this question, we need to look at the company's profitability.


AltaGas is usually profitable but has a rocky revenue history. Over the past four fiscal years, the company's revenue for the year has fallen twice.

If we increase the scale of the 2018 calendar year, the picture becomes slightly more ugly. In the third quarter, the company reported a $ 726 million net loss applicable to ordinary shares – greater than the profit generated in the three previous quarters. The final result was the nine-month loss of $ 676 million. The absence of "Hi Maria" in the fourth quarter seems that AltaGas is destined for a losing year in the fiscal year 2018.

However, the management said this would be a temporary condition: the company reported a "normalized" loss of only $ 17 million. In the third quarter, declaring that quarterly losses are due to unusual recurring circumstances.

Broken sector

Recent revenue problems of AltaGas are part of a wider model in the Canadian energy sector. In the 12-month period, the S & P / TSX energy index declined by about 21%, while Western Select Crude fell 18% over the same period of time. The last figure could explain the first: a company that extracts and sells crude oil will earn less if the price of crude oil drops.

This does not explain the difficult year of AltaGas: the company only extracts natural gas (not raw) and actually works partly as a utility. Nevertheless, the negative sentiment in the sector could pull off individual shares in it, which, when added to Albanian profit in the third quarter, could explain the 12-month loss of the company.

Close income plan

For the third quarter, AltaGas announced $ 162 million dividends, up from the same quarter of 2017. However, as the company lost money in the quarter, such a large dividend payment may not be the best move for management.

AltaGas has assets of about $ 22 billion, so it can continue to pay large dividends indefinitely even when it loses money in the short run. However, only $ 14 million of these assets are cash and cash equivalents, so maintaining payments will require asset sales (assuming the company does not return to profitability in the short term).

As Kay Ng notes, AltaGas already sells assets, putting the company's cash flow at risk. For these and other reasons, the AltaGas dividend is probably not the safest one you can find in the TSX.

The fool Andrew Button has no position in any of those shares. AltaGas is the recommendation of Founding Adviser Canada.

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