It is my opinion that Atlantic Power (AT) is an uninvestable stock. During the past year, Atlantic Power fed its investors with multiple shareholder presentations (I, II, III), that omitted crucial and relevant information regarding the safety of its dividend. Atlantic Power also failed to mention the concentrated nature of its distributable cash flows ("DCF"). Since it reported its Q4 2012 earnings, Atlantic Power's stock has been eviscerated, declining over 50%. YTD, Atlantic Power has declined a ghastly 60%.
The above chart needs some explanation, as it can tell the story of the decline of Atlantic Power. While I am by no means an expert in charts, I can tell you the approximate causes for each of the major declines experienced by Atlantic Power. Below is the same chart, with each major event color coded:
Let us first look at the blue oval:
This event saw Atlantic Power's stock price decline from roughly $15 per share to about $11.50. This corresponded to an abysmal Q3 2012 earnings report on November 5, 2012. The company performed poorly during the quarter and the stock price declined on the earnings miss. This quarter saw Atlantic Power with a massive 120% dividend payout ratio. However, notice that after this report, Atlantic Power's stock price had regained most its losses, and by late January 2013, was trading at about $13 per share.
This leads us to the brown oval:
This event saw Atlantic Power's stock price decline from about $13 per share to about $11.50. Notice that the $11.50 'floor' was hit twice during these price declines. This price decline was caused by Atlantic Power's announcement of the sale of its Florida assets on January 31, 2013. By mid-February, Atlantic Power had recovered most of its losses and was trading for about $12.20 per share.
Next comes the yellow oval:
This decline saw Atlantic Power's stock price decrease from about $12 per share to $10 per share. This decline mystifies me, and in my opinion, is the most suspect. There was no news released by Atlantic Power, and the dividend was declared as normal during this timeframe. Atlantic Power's stock price was about $10 when the next major event occurred.
Now, let us take a look at the pink rectangle:
I would hope that any holders of Atlantic Power's stock would know exactly what occurred here, but let me recap. On February 28, 2013, Atlantic Power released its Q4 2012 earnings. While the earnings were mediocre, what really sent the stock tanking was that Atlantic Power announced a 65% reduction in its dividend level. In addition, Atlantic Power adopted a shareholder rights plan (also known as a 'poison pill'). If this weren't enough bad news, Atlantic Power's guidance for 2013 was horrendous, with DCF dropping over 50% and the projected 2013 dividend payout ratio at nearly 100%. This last point warrants repeating: the payout ratio for 2013 is nearly 100% AFTER the 65% dividend cut. You can find a much longer explanation of these events in my prior two articles on Atlantic Power, here and here. After this event, Atlantic Power saw its share price collapse, from $10, to about $7.
Finally, we arrive at the orange rectangle:
During this time frame, Atlantic Power has seen its share price fall 33%, from $7 to the current price of $4.66 per share. No major events have occurred during this period. If I were to speculate on why Atlantic Power has continued to decline so sharply, I would guess that this is the 'slow' money (pension funds and mutual funds) leaving the stock. Atlantic Power is/was widely held by institutional holders in both the US and Canada. In addition, since Atlantic Power has fallen below $5 per share, many institutional holders may have been required to sell (sources: MSN Money, The WSJ).
Atlantic Power's management had previously touted the dividend's safety during Q3 2012, and yet cut it 65% the next quarter. I no longer trust any statements made by Atlantic Power. In terms of risk/reward, Atlantic Power carries massive risk, with relatively little return. Atlantic Power may rebound, but it could also continue its decline. The information needed to determine the DCF provided by the sold Florida assets was located on pages 55 and 56 of the 2010 10-K. I ask, why was this information not provided in any of the recent shareholder presentations? Also, what other surprises could Atlantic Power have in store for its shareholders? There are other much less risky stocks out there, and in my opinion, they provide much better risk-adjusted returns than Atlantic Power.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.