Recent Buy – Algonquin Power & Utilities Corp


Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. The market may go up and down depending on a plethora of events, but I look for safe dividends and developing income streams building my own pension.

I added to my position in Algonquin Power & Utilities Corp (AQN.TO) with 120 shares @ C$10.59. The company yields 5.07% adding US$46.20 (~C$63.75) to my annual passive income. Even though the company is listed on the Toronto Stock Exchange and based in Canada, reports all financials in CAD$, the dividends are declared and distributed in US$. The company switched to US$ distributions in Aug 2014. Holders of the stock will have their dividends converted to CAD$ by the broker, unless otherwise instructed.

Company Overview

Algonquin Power & Utilities Corp., through its subsidiaries, owns and operates portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in North America. The company generates and sells electrical energy through a portfolio of non-regulated renewable and clean energy power generation facilities. It owns or has interests in hydroelectric facilities with a combined generating capacity of approximately 120 megawatts (MW); wind powered generating facilities with a combined generating capacity of 675 MW; and solar energy facilities with a generating capacity of 10 MW, as well as interests in thermal energy facilities with an installed generating capacity of approximately 335 MW. The company also owns and operates electricity, natural gas, water distribution, and wastewater collection utility systems to approximately 488,000 connections. It serves approximately 93,000 electric connections; 292,000 natural gas connections; and 103,000 regulated water distribution and wastewater collection connections in the states of California, New Hampshire, Georgia, Illinois, Iowa, Massachusetts, Missouri, Arizona, Arkansas, and Texas. The company was founded in 1996 and is headquartered in Oakville, Canada.

The company also operates under the Liberty Utilities name. The corporate structure is:

APUC Corporate Structure

Algonquin Power & Utilities Corp – Corporate Structure

Recent Buy Decision

  • Algonquin Power & Utilities Corp (APUC) has stable growing revenues and earnings. The company oversees 31 water/gas/electric utility systems service 1/2 million customers.
  • A very diversified company with operations in electric, natural gas and water utilities industries – the only company I am aware of that operates in the three main divisions of utilities. A combination of regulated and non-regulated operational segments provide the company with stability that comes with being in the utilities space, but at the same time, can grow due to the non-regulatory segments.
  • Renewable energy generation exposure via solar and wind farms – which are non-regulated and offer tremendous growth opportunities. The company owns and operates 40 renewable and clean energy facilities with more than 990MW of net capacity and 486MW of contracted wind and solar development projects.
  • Water utilities investment exposure – one of the areas that I have been targeting to invest in. APUC has made numerous acquisitions (see list of M&A here) over the past few years to grow their water exposure, and the water utilities portion is expected to grow to a significantly higher portion over the next 4 years.
  • APUC last week agreed to acquire Empire District Electric Company (EDE) for US$2.4B, which gives the company control of regulated electric utility operations in Missouri, Kansas, Oklahoma, and Arkansas. The acquisition is expected to increase APUC’s EPS and FFOPS by 7-9% adn 12-14% respectively over the next three years (in addition the growth from other operations).
  • APUC cut its dividend in 2009 by 74%, but has started raising dividends since then. The current 5-yr dividend growth rate stands at 15.5%.
  • The stock price may seem stretched on the surface, with a P/E of 25 and Forward P/E of 17.8, but the company is expected to grow earnings at an rate higher than peers in the industry – thanks to a combination of non-regulated renewable industry growth coupled with regulated utility organic growth. Current analyst expectations are: revenue growth of 66% this year and 16.7% next year; and earnings growth of 91.8% this year and 19.5% next year.
  • With majority of operations in the US, a falling Canadian dollar and the US$ dividends from APUC providing extra tailwind; its a great investment for Canadian residents.
  • The company is targeting growth in assets and EBITDA of ~15% CAGR; EPS and cash flow growth of ~7-10% CAGR; and ~10% dividend growth rate. The following charts from Investor Presentation provide current mix of EBITDA and projected 2018 mix of EBITDA.
  • In this current volatile environment, an added benefit is that this is a very low beta stock, with a Beta of 0.09.

AQN - 2018 Exp EBITDA


  • While the renewable sector enjoys unregulated growth prospects, policy changes and regulation can put a damper on the growth.
  • The utilities sector can see pressure in the financial markets as the US Fed moves to raise the interest rates.
  • The company has aggressively raised dividends in the past taking payout ratio to unsustainable levels, and then had to resort to dividend cuts in 2009. The company is targeting aggressive growth avenues again – and current EPS payout ratio is 107%. However, the current payout remains well below the up-trending funds from operations and free cash flows.

Further Reading

Full Disclosure: Long AQN.TO. My full list of holdings is available here.

23 thoughts on “Recent Buy – Algonquin Power & Utilities Corp

  1. Thanks for sharing R2R! This is a company I’ve never researched, so it’s always nice to see a new company pop up (to me at least) within the DGI community. While you hate to see a company cut its dividend like they did in 09, it’s certainly understandable given the time it occurred and looks like they have recovered nicely.

    • Hi Agent,
      The company got ahead of itself – and even now, they are paying higher than they are earning, but its supported by the cash flow. Hopefully they wont need to cut dividends again. Unfortunately, this in low yield environment, investors have to take a bit of risk to get some return.


    • I went with the sister company of Atco – Canadian Utilities instead. Between that and AQN, I think I am pretty well set in the utilities space.

      I like AQN as it gives me exposure to water as well as electric businesses – something Atco/CU dont provide.


  2. JC says:

    Interesting pick and I like their mix with renewable, water, and the CDN/US split. Whats the split in operations/revenue between US and CDN? Definitely a utility that looks decent on the surface and with their expected growth. I’m curious why they have such an aggressive dividend policy seeing as how they had to make a big cut in 2009 because of what sounds like too aggressive of a dividend policy.

    Another concern is why the dividend cut? Was it debt related? Did they have a severe decline in rev/cash flow? Need cash for growth? Nonregulated assets fluctuate too much? The reason I ask is because utilities traditionally are considered stable companies with slow but consistent growth over time so a big cut like that is a concern especially with an aggressive dividend policy now and whether that could possibly be in the future if a similar situation unfolds. Definitely sounds like a candidate for further research on my part since I only own one utility company.

    • Hi JC,
      It is an interesting company indeed. The revenue mix atleast for 2014 was 90% US and 10% Canada – waiting for the 2015 annual report to see how much that has changed. Looks like the focus remains in the US – and I like the US utilities more since they tend to be a bit more profitable than the Canadian counterparts.
      The dividend policy is aggressive – and it does make me a bit nervous that they could setting up for a repeat of 2008 – but Ive decided to take a bit of a risk here – I will be keeping a close eye on the financials to see how things progress. The expected rev, earnings and ffo from operations still remains strong, but that should taper off in the coming years.


  3. Thanks for compiling all the information about the company. I have scheduled a small additional purchase to the beginning of next month. I have three utilities from the US and AQN from Canada. Have been thinking about adding another one from Canada.
    BR, DL

    • Good call, DL. AQN still gives you more exposure to US than Canada – since 90% of their revenue comes from the US. That only looks like its going to increase – with the added purchase of EDE. What are you looking to add for a second Canadian company?


        • Nice shortlist.
          I own CU. It has the longest streak of dividend raises in Canadian stock list. With CU you also get some exposure to Mexico, US and Australia – which is nice. The sister company Atco (ACO.X.TO) has lower starting yield but higher dividend raises each year, so you have a choice there.
          Fortis – another great company – and it seemed like growth had stalled, but they just purchased ITC Holdings recently – which should give it a good shot of growth in the coming years, although I am not too familiar with ITC’s businesses.
          Emera – I am not too familiar with, so I cant comment.

          Looking forward to see which one you buy.

  4. Looks solid. I like the mix of electric, gas, and water utilities all rolled into one, and am surprised to hear of the acquisition of EDE. I haven’t checked, but I wonder if it’s better idea to directly buy AQN or to buy EDE and wait for the shares to switch over. I haven’t really valued either stock.

    ARB–Angry Retail Banker

  5. This seems to be a popular stock among all the talking heads on BNN lately. I just went the other route and bought ZWU the BMO covered call utilities ETF. It had been beaten to a pulp so I stepped in last week during the sell-off.
    Good review of Aqn, thanks!

  6. Hi R2R,

    That sounds like a GREAT buy, utilities really are one of those tried and tested businesses that people will always use (and one of the last that people wouldn’t pay for). I particularly like companies that deal with water, it’s not something that can be replaced by a solar panel, I’ve heard of no technology that can replace the current sewage systems and water is a finite resource – it’s only going to get more expensive. I wish Australia had a listed water-utility company.

    Your company has a strong yield..but a very high payout rate (and is sacrificing re-investing in the company). If it paid out 50% then the yield would only be 2.5% so I hope they can grow the earnings strongly.

    Looks like a safe buy for these volatile times, one more step towards financial independence 🙂


    • Hmm I thought the Australian market was way more developed than the rest of the world when it came to water trading. We have to use water utilities and other proxies to invest in water – but I read somewhere that Australia has a much more advanced system — maybe its just not available for retail investors?
      Utilities, esp water, is something that Ive been really thinking a lot about – and would love to own one or two water utility companies in my portfolio. They seem to be pretty highly valued currently, so Im waiting for a better valuation — although I have to say, taht Ive been waiting for a couple of years now and that moment still hasnt arrived. Hopefully some market selloff/panic will bring us some opportunities.

      Algonquin is a bit of a riskier investment – the payout is quite high – higher than 100% of earnings, but below the FCF max they can do. The good thing is that they are growing revenue and earnings at a great pace, so the payout and those raises are sustainable. One of these days, they will have to figure out and taper off the growth — but for now, I am ok with a bit of risk.

      Best wishes

      • Hi R2R, nice reply.

        You’re right – Australia does have an advanced water trading system (it needs to, for such a dry interior). Any company (listed or mostly non-listed farming entities) can buy or sell water rights for the running of their business.
        But as an Australian investor, if you’re making an investment then you’re doing it for the farming business whilst including the water as an asset.

        As far as I’m aware there isn’t an Aussie Stock Exchanged listed water utility company that delivers water to the public or businesses – I’d be very interested if there was.

        Sometimes companies that are constantly in demand, regardless of economy conditions will have a higher valuation that others that aren’t, so you just have to choose a good time to buy, which it seems you have now 🙂

        It’s good the have the FCF to pay. I think with a starting yield of 5%+ you’d be happy to receive raises a little higher than inflation whilst the payout ratio slowly decreases?

        Again, nice buy R2R and I’m sure it will serve you well.


        • Thanks for providing some input and details. That makes sense on the water rights. If I remember correctly, the rest of the world – esp the western world is looking towards Australia and learn from the water trading system. So, you guys are paving the way 🙂 Its too bad you dont have a water utility company that serves the public to trade on the retail market.

          Thanks again for stopping by

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