1 Reason Atlantic Power Corp.'s Massive 11% Dividend Isn't for You

Source: Atlantic Power.

If you're a utilities investor, chances are you're in it for the big, fat dividends that come rolling out every quarter or, in Atlantic Power's (NYSE: AT  ) case, every single month. But there's one major reason why Atlantic Power and its super-sized dividend may not be right for you.

Risky business
Traditionally, utilities are attractive investments due to their consistent, inflation-protected returns. In four words: People always use power.

Regulators may prohibit companies from pulling in major profit, but those same regulators ensure specific returns on equity for utilities' regulated businesses. For example, TECO Energy (UNKNOWN: TE.DL  ) is in a much better place this year than last, since Florida regulators recently gave the thumbs-up for its Tampa Electric utility to pull in 9.25% to 11.25% return on equity. TECO Energy had previously expected its 2013 return on equity to clock in at less than 9%. 

But Atlantic Power operates exclusively in competitive markets. Although the company sells electricity to utilities and industrial customers under long-term power purchase agreements (PPAs), it's never guaranteed any percentage return on equity by regulators. Most utilities have their hands in both regulated and unregulated businesses, but Atlantic Power has chosen to stick with the riskier (albeit potentially more profitable) unregulated sector.

Big dividend = big trouble
There's a reason why Atlantic Power's dividend yield is currently 11%. Although the utility slashed its dividend by 66% in early 2013, its plummeting stock price has kept its yield at a rate that most of its competitors can't touch.

AT Dividend Chart

AT Dividend data by YCharts.

Exelon Corporation's (NYSE: EXC  ) stock is near its 52-week low, and it too cut its dividend by 40% earlier this year. But while Exelon stock has fallen just 6.3% in the last year, Atlantic Power stock has shaved off 69% of its overall value. That leaves Exelon stock with a 4.5% yield, less than half of Atlantic Power's.

EXC Dividend Chart

EXC Dividend data by YCharts.

Meanwhile, utilities like Southern Company (NYSE: SO  ) have steadily grown their dividend over the past five years and beyond. Its distributions look like a staircase, and even as Southern Company's share price has fallen over the last year, its yield remains a reasonable 5%.

SO Dividend Chart

SO Dividend data by YCharts.

How low can you go?
With Atlantic Power stock down in the dumps, many investors are eyeing Atlantic Power as a value grab. Just this week, shares flew 12% when the company announced that it would keep its monthly dividend distribution unchanged. But while that announcement will mean more cash in investors' pockets over the short term, it does little to nothing in terms of long-term value add.

Looking ahead, the company has a few things working against it. First, Atlantic Power relies on natural gas for 58% of its generation capacity  -- and natural gas is getting more expensive. Cheap natural gas has been the bosom buddy of the economic recovery, but rising prices are making other fuel sources like nuclear increasingly competitive once again.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts.

Second, Atlantic Power's scale pales in comparison to that of its competitors. The company has around 3,370 MW of gross generation capacity to its name, with ownership interests around 2,120 MW. Compared to Exelon's 34,700 MW of owned capacity and Southern Company's 45,740 MW of generating capacity, Atlantic Power doesn't hold a candle. And while scale isn't everything, the infrastructure of large generating facilities and transmission projects makes it especially important to this sector.

Atlantic Power shares may go up. It's made some interesting moves in the past year, including divesting traditional fuel plants and adding on a sizable chunk of wind and biomass power.

But shares may also continue their decline, and for shareholders looking for long-term investments with stable returns, Atlantic Power doesn't add up. Its risk outweighs its potential return, and its mouth-watering double-digit dividend yield simply isn't worth the worry.

The best dividends out there
Atlantic Power's dividend may not be dynamite, but there are other dividend stocks out there well worth their weight. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine.

With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2013, at 1:55 PM, Deepsix75 wrote:

    Got to respectfully disagree with you on your no-buy valuation here Justin. I got into AT at 3.15, and will be adding more to my IRA soon. I think management of AT has made the right decisions to ensure long term solvency of the company and with it trading $2 under book plus 10+% at current price I will be adding more in the near future as long as the situation remains the same. Hopefully I am being foolish... Or am I hoping I am not being foolish? lol time will tell.

  • Report this Comment On December 24, 2013, at 2:32 AM, cman663 wrote:

    I own quiet a bit of AT and am down on a portion of it. But do agree with you Deepsix75 that it is a good stock to get into at your price... Im holding on and seeing what happens with what I have, time will tell is the one sure thing. Like you are supposed to do on here, is "Fool on"!!!

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9/30/2016 10:56 AM
AT $2.47 Down +0.00 +0.00%
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