Is the APA (ASX:APA) share price an attractive buy for reliability?

Might APA Group be a leading pick for defensive earnings and reliability?

| More on:
Worker at a gas and oil pipeline.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • APA has a portfolio of quality gas and renewable energy assets
  • These assets generate consistent cash flow and distributions for APA
  • It has a growing pipeline of projects which are expected to add to its earnings when completed

Could the APA Group (ASX: APA) share price offer investors defensive earnings and reliability?

With a market capitalisation of $11.7 billion, APA is one of the larger businesses in the S&P/ASX 200 Index (ASX: XJO).

What does APA do?

It is the operator of 15,000km of natural gas pipelines that connect sources of supply and markets across mainland Australia. APA operates and maintains networks connecting 1.4 million Australian homes and businesses. It supplies half of Australia's natural gas usage.

But it owns more than just gas pipelines. It owns, or has interests in, gas storage facilities, gas-fired power stations and renewable energy generation. Those renewable energy sources are wind and solar farms.

Does it generate reliable cash flow?

If a business' cash flow is consistent then it may be able to offer lower volatility with the APA share price and also reliable distributions.

Not only can APA claim to have stable cash flow, but it can also point to growing cash flow. In a recent presentation, APA said that it has "stable business operations, solid cashflow with positive leverage to increasing inflation."

APA's policy when it comes to the distribution is to have a payout ratio of between 60% to 70% of free cash flow, whilst fully funding maintenance capital expenditure. This also supports the appropriate level of funding for organic growth capital expenditure.

But APA isn't just waiting on its existing assets to deliver growth. It's regularly investing in new projects, which can help grow the cash flow and distribution.

Growth projects

APA says that it has a growing organic pipeline of $1.3 billion over the next three years, which could be a boost for the APA share price.

For example, on the gas side of things, it's investing up to $270 million on the East Coast grid expansion, increasing the winter peak capacity by up to 25% through a two-staged expansion. Another investment is the Northern Goldfields Interconnect, costing up to $460 million, which is a new 580km pipeline that increases capacity to the Goldfields region.

But it's also investing in the energy transition. For example, it's working on the Mica Creek Solar Farm in Mount Isa. The investment is around $150 million. Stage two of the project comprises 44MW of additional solar power generation, for a cost of around $70 million.

APA also recently acquired an interest in the Basslink debt. Basslink is the business that operates the 370km high voltage electricity connector between Victoria and Tasmania. It's the only one connecting Tasmania and mainland Australia. It provides two-way access to 500MW of electricity. It's "critical" for the export of Tasmania renewable energy to the Australian mainland.

The business is looking across Australia and the US for opportunities to invest in electricity generation and transmission opportunities.

Another thing that could impact the APA share price in the coming years is if APA is able to convert some of its pipelines to carrying hydrogen. The Parmelia hydrogen project is exploring the viability of the pipeline to transport hydrogen.

APA distribution

APA is planning to pay a distribution of $0.53 per unit in FY22, translating into a yield of 5.3% at the current APA share price.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended APA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Blue Chip Shares

A woman presenting company news to investors looks back at the camera and smiles.
Blue Chip Shares

Buy these fantastic ASX 200 blue chips with $10,000

Analysts think these top stocks are buys right now.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Blue Chip Shares

The best ASX shares to buy and forget for 10+ years

Want to make long term investments? Here are three picks that brokers rate as buys.

Read more »

An ASX investor in a business shirt and tie looks at his computer screen and scratches his head with one hand wondering if he should buy ASX shares yet
Blue Chip Shares

This popular ASX 200 blue-chip share has literally gone nowhere in 17 years

Even blue-chip shares can fall short.

Read more »

Two smiling work colleagues discuss an investment or business plan at their office.
Blue Chip Shares

3 no-brainer ASX shares to buy now with $5,000

Brokers think these shares could be among the best to buy right now.

Read more »

Broker checking out the share price oh his smartphone and laptop.
Blue Chip Shares

2 ASX blue-chip shares offering big dividend yields

These businesses are predicted to pay significant passive income to shareholders.

Read more »

Smiling couple sitting on a couch with laptops fist pump each other.
Blue Chip Shares

2 dirt cheap ASX 200 blue chip shares to buy now with $10,000

Analysts think these cheap shares could be top buys.

Read more »

Young female investor smiling and speaking on mobile phone while sitting in front of laptop
Blue Chip Shares

Down 28% and 23%! Should I buy either of these 2 iconic ASX 200 shares?

These ASX blue-chips are trading at much cheaper prices. Are they buys to me?

Read more »

Multiracial happy young people stacking hands outside - University students hugging in college campus - Youth community concept with guys and girls standing together supporting each other.
Blue Chip Shares

5 ASX 200 blue chip shares to buy in FY26 with $5,000

Analysts think these shares could be top picks for the new financial year.

Read more »