Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.
I am just looking at APA and seeing that it has a very low return on capital, exceedingly high debt/equity ratio, why would anyone invest at current prices? Does the delay by 2.5 months in payment of the dividend x 28 dec but not paid until 14 Mar indicate slow/lumpy cash flows? The only plus seems to be a reasonable level of dividend yield and plenty of room to manipulate valuation of its main infrastructure assets. How do you value this type of business?
Hi Marvin,
This is a regulated utility with regulated cash flows, which means its earnings are highly predictable, but they have a reasonably low return on capital when you compare it to other companies. Debt is high because it’s underpinned by essential infrastructure that costs a lot to build or buy but provides consistent and known cash flows into the future.
We value APA on a yield basis relative to risk free bonds and ask the question whether or not enough premium is being offered to compensate for the risk. Over the long term, APA’s yield has averaged 2.8% above 10-year bonds yields. This got to below 2% as rates increased and we’ve written about this in the past at various times. The Consensus yield for APA is now 7.3%, which puts it on a 3.2% margin to bonds. Infrastructure does not like higher rates, but they love lower rates, and we think rates are coming down. We think APA is a buy here, and we are planning to increase our position in the Income Portfolio.
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