“Company ‘Guarantees’ Stock Dividend Into 2016” (Roger Conrad)

By Travis Johnson, Stock Gumshoe, September 30, 2010

We’re living in a bipolar world these days, it appears — I continue to get hundreds of email promos forwarded to me every day (thanks for that, by the way — the Gumshoe doesn’t work without fuel!), but these days the most ardent requests are those for either microcap gold or rare earth miners/explorers, or for the safest-possible sounding investments. Not a lot of boring old “regular” companies like breakthrough tech stocks or hidden biotech breakthroughs or undiscovered industrial gems or foreign markets … no, folks seem to be on either one extreme or the other: they want to pile into the gold trade with the most leveraged picks possible, or they want dividend income and safety.

So today, we’re looking at the latter. The tease comes in from Roger Conrad, stateside Dean of the Canadian Trust Punditocracy, as an inducement to subscribe to his Canadian Edge newsletter. Conrad has apparently navigated the “Halloween Surprise” fallout pretty well and didn’t abandon the sector like many investors did (that “surprise,” which hit the press on Halloween a few years ago, was the announcement that trusts would lose their tax shelter — they avoid taxes by passing income direct to shareholders, sort of like REITs — next year, on January 1.) That announcement decimated the share prices of most of the Canadian royalty trusts, the majority of which are oil and gas producers, but now that we’re getting close to that “conversion” date (when they’ll all be effectively converted into taxable corporations, if they haven’t already taken that leap) many of the trusts have recovered nicely.

Partly that’s because many of them have clear conversion plans, and have preannounced whether they’re going to continue to pay high dividends, or will reinvest their cash for growth, or something in between … and of course, oil and gas prices have a lot to do with it, too, as does the takeover premium some of these trusts have gotten as they sold out to private or foreign investors rather than deal with conversion.

But very few companies aggressively “guarantee” dividend payments five years into the future, so when Roger Conrad teased that one of his top conservative picks had done just that … and at a nice yield of 8% … well, it caught my eye. And then a few hundred readers sent it along as well, and it caught my nose. And my mouth. So while I’ve still got a few body parts left, let’s find out who this is, shall we?

Here’s how the letter gets you excited:

“Company “Guarantees”** Stock Dividend Into 2016

“Investors Applaud, Call Move Unheard-of

“‘Safer Than Bonds With Twice the Yield ….’

** “Based on management’s projections, cash on hand and projected cash flows from existing projects are sufficient to meet the current level of dividends to common shareholders into 2016…”
(Aug. 2010 release from management with 2nd-quarter results and dividend guidance)”

And yes, I do appreciate the “**” bit that clarifies what they mean by “guarantee.” And then we get it troweled on a bit thicker, with a few more clues:

“How could any company pay us a solid 8% dividend – monthly – then all but guarantee not to cut our dividend for at least four years?

“Imagine $830 million in market cap .. long-term debt a mere 90% of equity … customers locked in … a market price that has more than doubled since the 2008 market bottom.

“Now … imagine this company is rated 5 on a 6-point scale, where 6 is the safest.

“In other words, imagine a stock that belongs in the portfolio of every safety-oriented investor on the planet.”

Not enough? Here’s a bit more:

“Its shares are traded on the NYSE. It is incorporated in Canada to take advantage of that country’s generous policies, but its facilities mostly are in the U.S. Its headquarters are in Boston and its CEO is an American.”

Conrad goes on to tell us that this stock “more than doubled” since 2008, and that the dividend similarly “more than doubled” in that time frame … and that the dividend is “partially qualified” (meaning that at least part of it is eligible for the lower dividend tax rate, which is currently slated to disappear when the tax cuts expire).

So who is it? Well whaddya know, it’s our old friend Atlantic Power (AT in NY, ATP in Toronto). Atlantic Power was never a Canadian trust per se, but it was originally one of those odd entities referred to as “enhanced income securities” or “income deposit securities”, a mash-up of stock and bond — that was a structure invented to bring something akin to the popularity of the Canadian trust to US companies and other businesses that didn’t work well with a trust structure, but were stable companies who wanted to trade as high income stocks. ATP restructured a year or so ago into a regular corporation with “normal” common stock, but it remains a high dividend stock … and perhaps more importantly for US investors, it recently got a dual listing on the New York Stock Exchange, where a high dividend tends to stand out a lot more than it does in Canada, and the shares have been up considerably.

This is a power generation company, and is sometimes referred to as a “power income fund” — they are not a utility, but they own shares of power generation facilities and sell power to utilities on long-term contracts. And I really wish I had bought shares either back in early 2009 when I first wrote about them, or even back in February or May of this year when I expressed interest in the shares following other teasers on this topic.

Are they a “buy” now? Well, the extended “guarantee” (I’d call it more like “guidance” than a guarantee) is not new — last year they were predicting that they could maintain the payout until 2015, and this year they extended that to 2016, so that shouldn’t be a shocking new revelation. The current payout, which is what they say they can maintain, is 8.9 cents/quarter (I think they’re still basing this on the Canadian payout, which held at 9.12 cents/quarter since they converted to a regular dividend-paying stock, so it might be that it will fluctuate a bit with currency movement), here’s the actual wording from the latest announcement:

“Based on management’s projections, cash on hand and projected cash flows from existing projects are sufficient to meet the current level of dividends to common shareholders into 2016 before considering any positive impact from further potential acquisitions or organic growth opportunities. This time horizon has been extended from our previous guidance that such dividends could be continued into 2015. The updated guidance is based on improvements in our most recent long-term cash flow projections from our existing assets, as well as the anticipated cash flows from our recent Idaho Wind acquisition.”

So yes, it’s not as bold and sexy as “guarantee”, but it sound pretty solid — this is, after all, a fairly diversified company with over a dozen generation assets around the country, so they’ve done OK even when some have been shut in for maintenance or assorted problems. They are pretty small and they do carry a fair amount of debt (that’s common for utility-type companies), but the dividend, even after the stock price run-up, is still quite a bit higher than most power generation companies or electrical utilities (the utilities ETF yields about 4%, most of the big companies like Con Ed or Southern Co or AEP yield in the 4.5% range). It’s tough for me to get excited about the 7.7% yield this carries at the moment, but that’s probably only because I’ve looked at this one before when the effective income was about 13%. And I do like that their income statement appears to be stabilizing — they’ve paid out more than 100% of earnings in recent quarters and are aiming for a 100% payout for this year, but they say the payout will drop to 80-90% next year, which would give them more flexiblity and make it look less like their high dividend payout is skating on the edge of sustainability.

A yield of about 8% is nothing to sneeze at, though it’s worth noting that many of the utilities and similar stocks (telecoms, etc.) that yield in the 4-6% range also have histories of increasing their dividends, which AT has yet to indicate is in the cards. I know there are several of my readers who’ve invested in this one over the years, with probably some nice results, so please let us know if you’ve got a thought to share on Atlantic Power and their future.

And of course, as always, I’d be delighted to hear what you think of this newsletter — if you’ve subscribed to Canadian Edge, please click here to review it for your fellow investors at Stock Gumshoe Reviews (at the moment, this letter does make the top five for income investment letters according to rankings of past reviewers).

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14 Comments on "“Company ‘Guarantees’ Stock Dividend Into 2016” (Roger Conrad)"

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shredder
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shredder
September 30, 2010 12:21 pm

Bot ATP on a new share issue a while back at much higher yield levels. I like it, wish they had a DRIP

bruce
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bruce
September 30, 2010 1:03 pm

I bought ATP at about 6 a long time ago and wich I would have bought more, what a find !

BD
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BD
September 30, 2010 1:05 pm

This is a solid play. Stansberry & Associates called the ball on it,too, some time ago. It gaps down with the market and currency fluctuations, but not much. With the type of inflation and recovery pressures expected in the future this stock should help hedge such risks.

Fabian
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Fabian
September 30, 2010 1:25 pm

Got into it at 10 and doubled up at 11 and I'm very happy with this investment so far. Nice to read a good article about it.

Mary Ann
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Mary Ann
September 30, 2010 2:33 pm

This is literally my favoritie investment and largest position. I've been adding to my position since 2005. I used to buy more every time there was a correction, but it since it got listed on the NY stock exchange it just keeps going up.

Neil
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Neil
September 30, 2010 4:49 pm

I thought I was the only one who knew about this stock? I ahve owned for three years and have used it as a "cheking account" spending the generous dividends every month.

Cool Soupy

Bill
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Bill
October 1, 2010 12:57 am

So this company "sells power to utilities on long-term contracts". What happens if generation costs rise more than anticipated? What happens to the dividend then?
And what about the debt? What happens if interest rates rise unexpectedly?
There is an element of risk for utilities locked into long-term contracts in an inflationary
environment. It seems to me a lot more spadework is required to determine how well the company is protected.

Bob
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Bob
October 2, 2010 8:25 pm

Old age setting in….my earlier comment applies to tax advantaged account holding this security, such as an IRA.

Gravity Switch
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11
October 2, 2010 10:06 pm

AT was not a trust, technically, but I think generally withholding taxes on dividends are held regardless of whether it's a trust or a corporation paying the dividend — that's my experience with other countries with withholding taxes, at least, though as I hope I've said many times: I'm no tax expert. I think the tax treaty was updated within the last year or two, but I'm not sure if the treatment of dividends changed.

Doug
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Doug
October 15, 2010 8:28 am

If this is a pretty solid company paying out most or all of its earnings, why did they just do a share sale this week of over 5 million shares?

Armitage
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Armitage
October 25, 2010 7:16 pm

Very pleased with Conrad's recommendations. Got into ATP for under 9 and have bought several others.
Interesting that almost all show a pop in value when the anouncement of conversion and reduction of dividend is made.

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11
October 27, 2010 7:23 pm

AT was not a trust to begin with — I don't know if the withholding tax is just for specific investment types or not, for most countries who have such a tax it applies to all dividends, in my experience.

ken
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ken
September 30, 2010 12:46 pm

have this stock at $12.42 now over $14.00 and pays 9.12 cents every month not bad

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11
October 27, 2010 10:00 pm

Haven't looked at that, but companies that pay out all if their earnings often need to sell stock to raise money for growth if they want to make substantial acquisitions (new power plants, etc).

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