A planned acquisition south of the border has been canceled, leaving Algonquin Power & Utilities free to pursue other strategies.
The recent dividend cut, while not welcome, will help pay down the company’s relatively high debt and its longer-term prospects remain sound.
Meanwhile, the stock trades at 14.8 times the company’s 2023 earnings forecast.
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ALGONQUIN POWER & UTILITIES CORP. (Toronto symbol AQN; www.algonquinpower.com) has two main businesses: the Regulated Services Group provides regulated electricity, gas, water distribution and wastewater collection services in Canada, the U.S., Chile, and Bermuda; and the Renewable Power Group produces electricity from about 40 clean-energy plants in North America.
To conserve cash for its planned $2.65 billion U.S. acquisition of Kentucky Power Co., which generates and distributes electricity to 228,000 customers in Kentucky, Algonquin cut your quarterly dividend by 40.0%. Starting with the April 2023, payment, investors now receive $0.1085 U.S. a share instead of $0.1808 U.S.
The new annual rate of $0.434 U.S. still yields a high 5.0% and the new dividend rate represents a more sustainable 75% of its adjusted earnings compared to 125% before the cut.
However, U.S. regulators opposed the Kentucky Power Co. deal. As a result, Algonquin and Kentucky Power have agreed to cancel the takeover. Algonquin is not required to pay a termination fee.
Dividend Stocks: Conserving cash and selling assets will help pay down debt for Algonquin Power & Utilities
Meanwhile, Algonquin still plans to sell $1 billion U.S. of its less-important assets. That will let it pay down its long-term debt of $7.33 billion U.S. (as of March 31, 2022). That’s a high 1.2 times its $8.15 billion (Canadian) market cap.
Algonquin is also conducting a strategic review of its unregulated renewable power operations. That could lead to the sale or spinoff of that business. The company expects to make a decision in the third quarter of 2023.
Excluding any gains or losses on those asset sales, Algonquin expects to earn between $0.55 U.S. and $0.61 U.S. a share in 2023. The stock trades at 14.8 times the midpoint of that range. That’s a reasonable multiple in light of the company’s high-quality assets.
That’s a reasonable multiple in light of Algonquin’s high-quality assets. Its regulated utilities spanning electricity, water and natural gas distribution account for 80% of the portfolio. (Regulated utilities typically have monopolies and guaranteed rates set by government regulators.)
All in all, even with the weaker near-term outlook, the company’s longer-term prospects remain sound. That’s because despite today’s higher interest rates, the industrywide supply-chain disruptions and labour shortages, its strong revenue base is a big plus.
As a result of its recent dividend cut, Algonquin’s dividend has now declined an average 1.4% annually over the last 5 years. Its TSI Dividend Sustainability Rating is Average.
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