Algonquin Power & Utilities Corp. AQN-T has long been prized by investors looking for the stability of a utility, the growth of a renewable power operator and the big payout of a dividend powerhouse.
Now, though, these three reasons for owning the stock look increasingly frail.
After Algonquin reported disappointing third-quarter financial results on Friday, the stock price sank 19.3 per cent. It fell another 14 per cent on Monday, sending the stock to a six-year low and down by more than 50 per cent since early 2021.
The steep sell-off has driven up the dividend yield to 8.7 per cent, which is a dramatic change for a stock that yielded about 5 per cent at the start of this year.
The high yield suggests that investors have concerns over whether the current distribution is sustainable, given that the annualized payout is now as big or bigger than the after-tax profits the company will likely generate this year or next year, according to analysts.
“We have taken all dividend growth out of our model and, even still, the payout ratio remains 103 per cent of earnings per share in 2023 and 97 per cent in 2024,” Robert Hope, an analyst at Bank of Nova Scotia, said in a note.
Algonquin’s management said last week that it was targeting a dividend payout ratio of 80 per cent to 90 per cent, meaning that the company expects to distribute no more than 90 per cent of its profits as dividends over the longer term.
“This payout ratio target would be above its peers and, in general, makes growing the business without external equity more difficult. If the company does pursue a full reset, we could see a reduction in the dividend,” Mr. Hope said.
Algonquin did not immediately respond to a request for comment.
This has been a challenging year for utilities and renewable power producers.
Rising interest rates are weighing on the valuations of stocks largely valued for their steady dividends, as government bonds and even cash can offer yields that rival dividend-paying stocks. That helps explain why the utilities sector has become the worst-performer with the S&P/TSX Composite Index over the past three months.
As well, renewable power has been struggling with rising borrowing costs and renewed affection for traditional power as investors weigh the importance of energy security and reliability.
The iShares Global Clean Energy ETF, an exchange-traded fund that offers a basket of stocks related to renewable energy, has been on a roller coaster ride, sliding 26 per cent between August and October alone.
Algonquin, which operates regulated utility systems in addition to its renewable energy assets in Canada and the United States, has been buffeted by these broad economic challenges.
But the company’s third-quarter results also reflected issues more specific to its operations.
The company reported a profit of just 11 US cents a share, after adjustments. That was down 27 per cent from the same period last year and well below the 16 US cents a share that analysts had estimated, on average – partly because renewable power generation was weaker than expected.
Algonquin also lowered its profit estimates for 2022, citing delays in completing certain renewable energy projects. The company added that it was “evaluating its longer-term targets and financial expectations,” given that the challenging economic environment will continue into next year.
Clearly, many investors have been rattled by this uncertainty and fear the worst.
Sure, there could be an upside here: The tumbling share price is already reflecting an ugly future, and the higher dividend yield suggests that an unwelcome shift in dividend policy may be baked in.
David Quezada, an analyst at Raymond James, noted that the shares are trading at a new low point relative to estimated profits, suggesting they’re cheap on a key valuation metric.
“While we acknowledge that the growth outlook is uncertain for the time being, we expect the company’s upcoming investor day will provide some clarity in early 2023,” Mr. Quezada said in a note.
But a stock long prized for its growth, rising dividend and stability during economic rough patches may now have to appeal to a new type of investor – one that’s willing to take a chance on a turnaround.
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