I like APA as an ASX dividend share idea. Here’s why

APA has performed well as an ASX dividend share in my opinion.

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Key points

  • APA is one of my preferred ASX dividend shares
  • It has been growing its distribution in consecutive years for a long time
  • The business is working on multiple energy projects, including renewable energy

APA Group (ASX: APA) looks like a good ASX dividend share in my opinion.

The gas and electricity infrastructure business has seen a solid performance over the last 12 months. In the past year, the APA share price has gone up by almost 25%. That compares to the S&P/ASX 200 Index (ASX: XJO) which has only risen by 1.6% over the past year.

Here are the reasons why I think APA can be an effective ASX dividend share:

Dividend yield and growth

APA has been growing its distribution to shareholders for many years in a row. It has one of the longest consecutive growth streaks on the ASX. It’s getting closer to 20 straight years of increases. I think this sort of growth history is an attractive factor about the business.

It’s expecting another annual increase in FY22. The annual distribution for the current financial year is expected to be 53 cents per security, which would translate into growth of 3.9% for the year.

At the current APA share price, it has an FY22 distribution yield of 4.6%. I think that’s a solid starting place for the business.

APA notes that its recent distribution growth reflects strong cash conversion and benefits from the March 2021 debt refinancing activities and a positive outlook.

Growing cash flow

APA funds its distribution to investors from its cash flow, which continues to increase. In the FY22 half-year result, free cash flow went up by 22.6% to $515.1 million.

The business is benefiting from the rise in its revenue as well as the conveyor belt of projects that are being completed.

APA says it’s favourably exposed to rising inflation, with almost 100% of its contracted revenue linked to inflation indices. That might explain some of the recent strength of the APA share price.

The ASX dividend share notes that its organic growth pipeline now exceeds $1.4 billion in value. Organic growth opportunities are being sourced from across all of APA’s strategic focus areas. New projects are underway across both gas pipelines and renewable energy.

It’s also executing its strategy to grow its electricity footprint with a strategic investment in the senior secured debt of Basslink. It’s going to work with Hydro Tasmania, the State of Tasmania, the Australian energy regulator, and other key stakeholders to convert Basslink to a regulated asset.

Future-focused

A lot of APA’s value is focused on pipelines which transport around half of Australia’s natural gas usage.

In the future, hydrogen could play an important role for the business. That’s why it is partnering to assess green hydrogen opportunities through the Central Queensland Hydrogen Consortium. In addition to local supply, there is an ambition to export supply to Japan’s industrial market.

If APA can convert its pipelines to transport hydrogen, then it can future-proof the business.

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 has positions in and has recommended APA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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