Has the Momentum Run out of Algonquin Power & Utilities Corp?

After an incredible run, investors need to be very cautious about shares of Algonquin Power & Utilities Company (TSX:AQN)(NYSE:AQN).

| More on:
The Motley Fool

Over the past six to eight months shares of Algonquin Power & Utilities Corp (TSX:AQN)(NYSE:AQN) have been on an incredible run. Touching a low price of $10.47, shares have since rebounded to a price as high as $14.35 only to fall back to around $14. Currently offering a dividend yield slightly above 4.5%, investors buying today may not be getting a whole lot more.

When shares traded at a price of $11 per share, the dividend was slightly above 5% which was subsequently raised by a penny per share while the stock price continued to move forward. Although shares may have peaked in the short run, it is difficult to believe that this story is all but over. In the defensive business of producing electricity, this utility company is one of the most defensive companies available in this category.

For investors who are unfamiliar with the term, defensive companies are characterized by having minor variances in revenues and earnings during good or bad economic times. Cyclical companies on the other hand have very large fluctuations in revenues and earnings depending on the phase of the economic cycle.

After looking at the price history of Algonquin Power & Utilities Corp over the past year, it is clear that the stock has gotten ahead of its own momentum. Although shares have traded consistently above the 10-day simple moving average (SMA), rarely was there a major gap up until the past few weeks. The result of this has been a pullback which has sent shares under the 10-day SMA and now the 50-day SMA is starting to catch up. This may not be a good sign.

What investors need to understand from moving averages is just how momentum has time to pause and restart before the failure to do so becomes detrimental and shareholders then fear a reversal – shares decline. Currently the large leg up has led to a minor reversal which could continue down further.

Considering the future of the company, the incredible returns of 30% or more in less than one year may be behind us. Instead, the stock may offer investors an appropriate return made up of a dividend yield closer to 4.5% and minor capital appreciation. A return of 10% per year on a defensive utility stock is very good.

Looking at the dividends paid, the payout ratio as a percentage of cash from operations (CFO) has been 44.5% in 2016 and 34% in 2015. After purchasing another competitor in the space, the amount of dividends paid for the first quarter of 2017 total $32.5 million out of CFO of $83.8 million. The percentage is 38.8%.

The most obvious catalyst for investors to experience another bull run for shares of Algonquin Power & Utilities Corp would be another increase in the dividend. Assuming the payout ratio increases to a percentage in line with the 2016 amounts, shares could potentially rise again. Barring that however, investors may need to be very patient.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman is long shares of Algonquin Power & Utilities Corp. 

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

4 Ways to Grow $100,000 Into $1 Million in Retirement Savings

Anyone can build a million-dollar retirement portfolio. Here are four ways you could practically grow $100,000 to $1 million.

Read more »

A shopper makes purchases from an online store.
Dividend Stocks

3 Reasons to Buy TFI Stock Like There’s No Tomorrow

TFI stock (TSX:TFII) had a hard 2023, but now it's set up for a solid 2024, with an acquisition that…

Read more »

Dividend Stocks

5 Secrets of TFSA Millionaires

These lesser-known secrets can help you set up the perfect long-term portfolio and achieve a million-dollar TFSA!

Read more »

analyze data
Dividend Stocks

How to Build a Powerful Passive-Income Portfolio With Just $20,000

These fundamentally strong TSX stocks have paid and increased their dividend in all market conditions. Add these stocks to build…

Read more »

Canadian stocks are rising
Dividend Stocks

iShares S&P/TSX Capped REIT Index ETF (TSX:XRE): Why I Like this ETF Better Than a Rental Property

XRE is a great ETF for gaining exposure to the Canadian real estate sector.

Read more »

Payday ringed on a calendar
Dividend Stocks

3 High-Yield Dividend Stocks That Pay Cash Every Month

These three dividend stocks all offer high yields and have sustainable dividends, making them some of the best investments to…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

3 Stocks That Could Create Lasting Generational Wealth

If you want to start transferring over your wealth, you'll need to actually have some! And these are three stocks…

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

Down by 25%: Is Canadian Tire Stock a Buy in February 2024?

Take a closer look at this Canadian retail stock if you are looking for low-cost additions to your self-directed portfolio…

Read more »