Value Stocks: Algonquin Power & Utilities makes big buy

Cash flow increases for Algonquin Power & Utilities—despite the company’s rapid growth through acquisition. Its latest purchase is a regulated utility that serves 218,000 customers.

Algonquin recently announced its biggest acquisition to date: the $3.4-billion purchase of Empire District Electric Co. Empire is based in Missouri, and serves over 218,000 customers through eight power plants with 1,326 megawatts of generating capacity. Subject to regulatory approvals, the deal should be completed in early 2017.

ALGONQUIN POWER & UTILITIES CORP. (Toronto symbol AQN; www.algonquinpower.com) has tripled in size in the past three years, mostly through acquisitions.

The company’s regulated utility businesses now provide water, electricity and gas to over 560,000 customers, up sharply from 120,000 three years ago. Its hydroelectric, thermal energy, solar and wind plants generate 1,050 megawatts, up from 460.

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Emera (Toronto symbol EMA) owns 20.9% of Algonquin. It is a recommendation of The Successful Investor, our conservative growth advisory.

In the three months ended December 31, 2015, Algonquin’s revenue rose slightly, to $260.3 million from $259.3 million a year earlier. Cash flow per share rose 11.1%, $0.30 from $0.27.

Value Stocks: Deal adds 1,326 megawatts to generating capacity

Algonquin recently announced its biggest acquisition to date: the $3.4-billion purchase of Empire District Electric Co. Empire is based in Missouri and serves over 218,000 customers through eight power plants, with 1,326 megawatts of generating capacity. Subject to regulatory approvals, the deal should be completed in early 2017.

Growth by acquisition—particularly rapid growth—adds risk. But Algonquin cuts that risk by buying profitable utilities. It also ensures its renewable energy projects sell their power under long-term government-guaranteed contracts. In the case of Empire, its customer rates are set by utility regulators to guarantee profits for the company.

The stock trades at 8.4 times its forecast 2016 cash flow of $1.28 a share. The shares yield 4.8%.

Recommendation in Canadian Wealth Advisor: BUY

For our report on another Canadian value stock, read Finning International moves ahead with lower costs and high dividend.

For our view on another aspect of investing for value, read Are stocks or bonds better for your portfolio?

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Scott Clayton

Scott is an associate editor at TSI Network. He is the lead reporter and analyst for Dividend Advisor, Power Growth Investor and Canadian Wealth Advisor and a member of the Investment Planning Committee. Scott began his investment and financial career working with Pat McKeough at The Investment Reporter in the 1980s. Subsequently, he worked at the Financial Post Corporation Service for 10 years. He joined TSI Network in 1998. He is a Bachelor of Economics graduate of York University, and he also has an M.B.A. from the Schulich School of Business.

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