Buy, Sell, or Hold: Atlantic Power

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Atlantic Power (NYSE: AT  ) today, and see why you might want to buy, sell, or hold it.

Founded only in 2004 and headquartered in Boston, Atlantic is a power generation and infrastructure company focused on the U.S. and Canada. The company has a market capitalization of about $1.4 billion, and its stock is down about 12% over the past year.

Buy
One reason to like Atlantic Power is its industry: It's a classic "defensive" one, as consumers are not going to put off buying electricity because times are tight. Utility companies have long been viewed as reliable dividend payers, and Atlantic offers a heck of a dividend at the moment, recently yielding a whopping 10%. It would be reasonable to check the company's dividend payout history, to get a sense of how rapidly it might grow, but this dividend was initiated only in 2010. Though it has fluctuated a bit, it's up a total of 8% since it began. This dividend is paid monthly, too, as opposed to the more typical quarterly arrangement.

Another plus is that the company is investing heavily in itself, sporting a higher capital expense ratio than many peers. That's good, as new projects can pay off in the future. But some might reasonably worry whether the company can afford to spend as much as it's spending. Along with traditional electricity generation, Atlantic is also dealing in alternative technologies such as biomass, hydroelectric, and windpower.

Then there's this: Despite many hand-wringers, the tide has turned a bit, with analysts at Canadian BMO Capital Markets recently initiating coverage of the stock with an "outperform" rating and Desjardins analysts giving it an even more confident "buy" rating. That bodes well, suggesting that these folks see value in the stock, but remember that even good analysts are wrong sometimes. When my colleague Rich Smith reported on these upgrades, he noted that there are less risky companies out there that have also been upgraded or rated highly -- such as Sirius XM Radio (NASDAQ: SIRI  ) , which is actually profitable and growing, though it remains dividend-less.

Sell
Remember that whopping dividend? Well, it won't necessarily remain so whopping. The company has posted net losses instead of net gains in recent years, making its payout not very sustainable unless it moves back into the black. Free cash flow was positive as of a few years ago, but the past two or so years have reflected losses.

Another concern is stock dilution, as the number of shares outstanding has nearly doubled over the past few years. If that keeps up, then the value of existing shares may keep shrinking.

You might be happy to see Atlantic Power's short-term debt falling, but that's peanuts next to its long-term debt, which has gone from about $800 million in 2007 down to $433 million in 2009 -- before ballooning to more than $1.5 billion as of September. That's worrisome because if the company can't make its debt obligations, it might resort to issuing more shares or selling off valuable assets. The company issued a lot of relatively high-interest rate debt last year, executing a growth-by-acquisition strategy as it aimed to double its capacity. (The company recently announced plans to buy wind-and-solar specialist Ridgeline Energy for $88 million.)

Meanwhile, operating profit margins have been shrinking in recent years, while net margins are negative.

These kinds of factors have turned off investors enough that about 3.7% of shares outstanding had been shorted as of late November. That represented eight days' worth of trading at recent volume levels.

Hold (off)
Given the reasons to buy or sell Atlantic Power, it's not unreasonable to decide to just hold off on it. You might want to wait for it to become profitable and to generate lots of free cash flow. You might want to be more certain that its dividend won't be eliminated, or cut much.

You might also consider other energy companies. If you're willing to invest in a substantial nuclear-power powerhouse, take a look at Exelon (NYSE: EXC  ) , which also generates power via alternate means. It's huge and geographically diversified -- and recently yielded 7% (though that might drop some). Contrast that with National Grid (NYSE: NGG  ) , recently yielding 4%, which has its operations focused mainly in the northeastern part of the United States and also in the U.K. National Grid has been hiking its payout by an annual average of 10% over the past five years, though, which is promising, versus just 3.3% for Exelon.

PPL (NYSE: PPL  ) also has many admirers and recently yielded a solid 5%. It has been growing at a faster clip than many peers, with double-digit average annual growth rates for revenue and earnings over the past three years. (These rates have been accelerating, too.) Its UK operations are doing particularly well, and the company has been focusing more on regulated generation, which tends to be less risky. Its capital spending has driven up its debt burden, though, and the company's Pennsylvania operations got whacked by Hurricane Sandy.

The verdict
I'm holding off on Atlantic Power for now. But everyone's investment calculations are different. Do your own digging and see what you think. Atlantic Power may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.

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  • Report this Comment On December 28, 2012, at 9:40 AM, jimslag wrote:

    Hello, I used to own AT. One drawback is that even though it is based in Boston, it is a Canadian company. So if you own it in an IRA, you lose the 15% tax withholding.

  • Report this Comment On December 28, 2012, at 2:03 PM, 0b1knob wrote:

    There is no withholding on AT dividend as long as they are in an IRA. There was at one time but that ended about a year ago.

    The biggest problem with AT right now is the expiration of power generation contracts with Progress power in Florida. The contracts might be renewed at lower rates or the power plants may even be sold. Until the situation is resolved it will continue to depress the stock.

    I suspect much of the short selling is hedging related to AT's convertible note issues.

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