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Atlantic Power Corporation: Slashed Dividend Hides Discount To Book

Atlantic Power Corporation (AT) (ATP) has had a tough year-to-date. Traditionally thought of as a defensive utility dividend play, the company’s stock price slumped earlier this year when management slashed the dividend payout by 70% to conserve cash, angering dividend investors. What’s more, consensus of opinion seems to point to another dividend cut at some point early next year. Indeed, a further payout cut may be required as the company has several debt issues maturing during between now and 2017, which it will not be able to meet unless it improves its financial position.

Moreover, the company is struggling with a high cost of capital. Data supplied by Morningstar indicates that the company’s bonds have a fixed coupon of between 5.6% – 11%, while the company’s preferred stock pays ten year treasury rates +4.5%, which works out at around 6% right now, the running yield is over 13%.

However, all of this aside, the one thing that I believe is being missed out by many commentators is the company’s current discount to book. At the end of the fiscal third quarter, Atlantic’s book value per share was around $5.23, 40% above current levels. This gives somewhat of a margin of safety. In addition, if we concentrate on the price-to-book value and ignore the imminent dividend cut we can view the company with a long-term horizon. Actually, viewing the company in this light you start to realize that slashing the dividend payout again will be nothing but beneficial to the long-term financial health of the company.

Atlantic Power is guiding for a payout ratio

Still, as of yet it is not confirmed that the company will cut its payout again. The dividend payout ratio for the nine months ended September was only 43%, which is lower than that of many of the company’s peers and certainly lower than the ratio for the similar period last year, when the company’s dividend payout ratio was in excess of 90%. For the full-year 2013, Atlantic Power Corporation (AT) (ATP) is guiding for a payout ratio in the range of 65% to 75%, which is of more concern. However, the company has several new projects coming online within the next few months, which should boost cash flow.

Nonetheless, if we return to the issue of the company’s equity value and financial health, Atlantic is selling off non-core assets off in an attempt to reduce debt and this plan is already starting to work, albeit slowly. For example, the company’s net debt had only declined 6% year-on-year at the end of the third quarter. Bear in mind, however, that the company did make significant equity investments and funded construction programs during this period, which slowed debt reduction. What’s more, the $54 million quarterly dividend payout to investors did not help and this brings us back to the dividend argument. Slashing this annualized payout of $216 million in half once again would give the company an extra $108 million a year in free cash flow — not good for dividend investors but good in the long-term for the company as it seeks to pay down debt.

In the short-term Atlantic is going to struggle

So in summary, Atlantic Power Corporation (AT) (ATP) is going through a period of significant restructuring and investors should focus on book value, not the attractive dividend payout, which looks like it is getting the axe. That said, even after cutting the payout in half, the company would yield approximately 5% at current levels. In the short-term Atlantic is going to struggle but long-term the company looks attractive for its discount to book.

-By Rupert H

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