Existing shareholders will see their slice of ownership shrink a little since the new offering will raise the number of outstanding shares by 4.7 per cent.Handout
When a company announces a big new offering of shares, you can probably kiss goodbye whatever rally had been in the works. But it can also offer a chance to buy more shares.
Algonquin Power & Utilities Corp. expects to close an offering on Wednesday that will see the Oakville, Ont.-based renewable energy producer and distributor sell an additional 23 million shares priced at US$13.50.
The offering price marks a 4-per-cent discount to the stock’s record high of US$14.06 in New York last week, before the company announced the offering. The stock has been wavering since then: The share price fell as much as 5 per cent by last Friday, ending a 40-per-cent rally since the start of the year.
No doubt, the new offering raises a couple of issues for investors who have bet on Algonquin’s growth-oriented approach to wind, solar and hydroelectric generating facilities in Canada and the United States.
One issue: dilution. Since the new offering will raise the number of outstanding shares by 4.7 per cent, existing shareholders will see their slice of ownership shrink a little.
The other issue: Algonquin may be signalling that the valuation on its stock is a bit stretched.
After this year’s strong gains, the stock’s price-to-earnings ratio has risen to 23.4 (using trailing 12-month profits), up from a P/E ratio of 16.6 at the end of 2018.
What’s more, the dividend yield has fallen below 4.2 per cent, down from 5.1 per cent at the end of 2018 and near the low end of a historical range since 2010.
So, yes, the stock is pricey. But investors should look at the upside: Here’s a company with a good track record of fuelling growth for long-term investors, and minimizing concerns over dilution by tapping the market when its shares are richly valued.
“The market is awarding Algonquin a very low cost of capital, helping to make its acquisition-based model work,” Greg Payne, a portfolio manager at Greenchip Financial, a Toronto-based investment firm that focuses on environmental themes, said in an e-mail. (Greenchip does not own Algonquin shares.)
The current offering marks Algonquin’s fourth since 2015, and the share price in Canadian dollars on the TSX has done relatively well after each offering.
The company issued 37.5 million shares at $11.85 in April, 2018. Six months later, the shares had delivered a return of 10.3 per cent after including dividends. That beat the 2.2-per-cent decline in the S&P/TSX Composite Index and the flat performance by the utilities sector (also after including dividends).
Algonquin issued 43.5 million shares in November, 2017, at $13.25 a share. Although the total return was negative 3.1 per cent after six months, the return beat utilities by nearly five percentage points. The return was a decent 7.3 per cent within a year, beating the TSX by more than nine percentage points.
Algonquin issued 14.34 million shares in December, 2015, at $10.45 a share. Six months later, the shares had returned 15.4 per cent, also beating the TSX and utilities.
Coincidence? No way.
In addition to organic growth, Algonquin is expanding successfully through acquisitions. Its total assets are now valued at about US$10-billion, up from US$3.5-billion in 2015. Annual revenue over this period has doubled to about US$1.6-billion. Most recently, the company completed a deal for New Brunswick Gas earlier this month and struck a deal in June for Bermuda Electric Light Company.
“With equity in place to fund near-term growth objectives, we believe the shares can continue to appreciate as the company continues with solid execution,” Mark Jarvi, an analyst at CIBC World Markets, said in a note.
The short-term sell-off could be a long-term buying opportunity.
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David Berman