Algonquin Power & Utilities’ decision to sell its non-regulated renewable assets and focus entirely on its regulated utilities business is a game-changer.
This move significantly reduces risk and enhances earnings predictability because regulated utilities typically offer more stable cash flows and returns. While the company recently reduced its quarterly dividend by 40.1%, the new annual yield remains highly competitive and particularly appealing given its lowered risk profile.
Meanwhile, the stock trades at just 16.3 times the company’s forward earnings forecast.
ALGONQUIN POWER & UTILITIES (Toronto symbol AQN; www.algonquinpower.com) has agreed to sell most of its non-regulated renewable power assets, which produce electricity from about 40 clean-energy plants in North America, to LS Power.
Algonquin will receive $2.28 billion when it completes the transaction in late 2024 or early 2025 (all amounts in U.S. dollars). It could receive an additional $220 million depending on the future performance of those assets.
The company has also agreed to tender its 42.2% stake in Atlantica Sustainable Infrastructure plc (Nasdaq symbol AY) to an investor group that is buying that firm. It will receive $1.08 billion.
Algonquin plans to apply the cash from those sales to its long-term debt of $8.29 billion (as of June 30, 2024). That’s a high 2.3 times its $5.1 billion (Canadian) market cap.
The sales will let Algonquin focus solely on its regulated utilities, which supply electricity, gas, water distribution and wastewater collection services to 3.15 million customers in Canada, the U.S., Chile and Bermuda.
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Partly due to the loss of cash flow from its renewable operations, Algonquin has cut your quarterly dividend by 40.1%. Starting in October 2024, investors began receiving $0.065 U.S. a share instead of $0.1085 U.S. The new annual rate of $0.26 U.S. still yields a solid 5.4%.
As a result of its recent dividend cut, Algonquin’s dividend has now declined an average 14.3% annually over the last 5 years. Its TSI Dividend Sustainability Rating is Average.
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Meanwhile, in the three months ended June 30, 2024, Algonquin’s revenue fell 4.7%, to $598.6 million from $627.9 million a year earlier. That’s mainly because it passed along lower natural gas prices to its customers. If you factor out unusual items, earnings improved 16.0%, to $65.2 million from $56.2 million. Due to more shares outstanding, per-share earnings rose at a slower rate of 12.5%, to $0.09 from $0.08.
Going forward, shifting to a pure-play regulated utility firm will cut Algonquin’s risk while satisfying activist investor Starboard Value, which owns 7.5% of the stock. Moreover, its dividend payout ratio will be a more sustainable 60% to 70% of its long-term earnings.
The shares trade at a moderate 16.3 times forecast earnings, a reasonable multiple in light of the high yield and the company’s newly focused outlook.
Recommendation in Dividend Advisor: Algonquin Power & Utilities Corp. is a buy.
