I invest for income, especially for growing income. It was the main reason I preferred to invest my money into dividend growth stocks.
For income-seeking investors like me, it is really hard to accept a dividend cut.
A dividend cut is obviously a small setback in my freedom journey, but it is not the end of the world.
I am sure that AltaGas Inc (TSE: ALA) is in many Canadian investors’ portfolios because it was a well-run company in a defensive sector and rewarded its shareholder with growing-juicy-monthly dividend for many years.
But it seems like things are getting worse and its dividend is at risk.
It looks like the company is struggling to meet its funding demand after the $9 billion acquisition of WGL Holdings, Inc. (WGL).
According to many financial analysts and market experts, the latest acquisition – WGL made by ALA was a high-quality company but the price paid for it was higher than its actual value. As result, ALA share price gets tanked.
I initiated a small position in December 2014 for $39.85 – when the company was growing and paying a secured dividend, and then slowly built my positions as share price was sliding down and stopped adding new money after June 2017.
Currently, I have 150 ALA shares in my Canadian portfolio with the average purchase price of $30.87.
As of this writing, ALA is exchanging hands for around $14.40.
It is a nasty drop and I have a paper lost around $2470 with this investment. It is heck lots of money to my income level.
During the period, I received around $838.28 dividends from ALA. Thus, my investment (paper) lost was partially offset by the dividend payments.
Therefore, my total paper lost with this investment is around $1632.22 (with dividends). Still, it is big money for me and the amount is almost equal to my bi-weekly salary.
But, it is actually a different story in my portfolio. Thanks to my diversification approach.
Currently, my overall portfolio value is around $232 000. So, ALA represents less than 1% of my portfolio value.
Even, it was representing less than 2% before its share price started to slide down.
Therefore, the damage caused by this investment within my portfolio is very minimal.
Some readers have commented that I have too many holdings and I am too diversified. But, this is the only way I can minimize the risks from unexpected events! And, this is the proof.
I am still working full-time to meet financial needs, and don’t have enough time to read all the quarter results from all the companies I have.
Therefore, small investors like me; diversification is the only way to minimize the risk.
Will ALA cuts its dividend?
I am not sure. But, based on the company Q3 results it is most likely.
In Q3, the company has generated $117 million in the fund from operations (FFO) and paid $162 million in dividends. So, the payout ratio is more than 100%, which means the company is paying more than it makes.
But in the first nine months (until September 30), the company has generated $407 million from fund-from-operation and paid $357 million in the dividend, the payout ratio is around 88%.
However, the company needs over $1 billion to pay the bridge loan, the loan was used to purchase the WGL. Also, ALA needs some money to fund some growth projects.
So, there is a high chance for a dividend cut.
I expect dividend cut announcement may come on December 13 with the next year company financial and operational outlook conference.
ALA has mentioned that it will discuss the 2019 outlook, capital plan and update on their strategy for 2019 on December 13.
Most analysts expect an announcement about the new dividend policy during the meeting.
Disclaimer..
Please note the information posted on this website is the opinion of my own and should not be considered as professional financial advice. I am not a financial professional, and I can buy, sell, or hold any investment at any time.
Any transactions I publish on this website are not recommendations to buy or sell any securities or investments.
My financial situations, goals and risk tolerances will be much different than you. Therefore, please do your own research or consult with a qualified financial professional before even considering using the information obtained from this website.
What I am going to do with my ALA shares.
As I mentioned above, it is a relatively small position in my portfolio and 50%-60% dividend will reduce my estimated annual passive income by just 1% to 1.5%.
To be honest, I really don’t want to see these types of reduction in my journey, but unexpected things are hard avoided in the stock markets. It is the fact, and we have to accept it.
Almost a year ago, I had a distribution cut from BEI.UN and its unit price got hammered, but later it recovered. I am expecting a similar cut from ALA. I think company needs a deep dividend cut, which is important to repair its balance sheet.
I expect that share price will remain under pressure for while depends on the deep of dividend cut, and also due to tax harvesting selling.
For now, I am not planning to sell this stock, and I understand the risk I am taking. Altagas Inc. has some great assets and it is trading much less than its book value. But, my concern is the company debts.
I assume that management can fix the issues in a long-run. Thus, I may consider adding a few more shares if its share price comes down significantly low from here.
Again, I understand that I am taking above average risk with this stock, but any bad news on this particular one won’t de-track my journey. If that happen, I will learn new things from the mistake and move on.
As regular readers know that I invest for the longer term, and most of the investments I made have done really well for me. And, I have had some losses too. But, overall my gains have been much higher than any loss.
In a side note, there are two other stocks have been struggling in my portfolio, but they are relatively small positions as well. So, I am going to give them a chance rather than selling them at the lower price.
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