A stock that has it all? That’s what we’re all looking for.
Indeed, I think Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) fits the bill nicely. This stock is typically regarded as a regulated utilities player, which it is. However, I think the company’s growing renewables business provides handsome growth for long-term investors.
Impressive growth profile driven by renewables
Algonquin’s growth profile is appealing to me right now. In particular, the company’s renewable power assets are what I think will “power” returns for investors long term. The company has engaged in a number of acquisitions in recent years that have turned out to be well timed. Indeed, a spike in interest in ESG investing has been the tide that has lifted all boats in this sector.
The company generates about one-third of its revenue from its renewable investments. Algonquin has also stated it may be looking at more acquisitions on the horizon. I think this utilities player could try to achieve a 50-50 mix of regulated utilities and renewables.
Indeed, an expansion of this line of business would be positive for this stock in a few major ways. First, renewable energy is just good business. Profit margins continue to rise, as input costs are lowered and demand for renewable power increases. This is a sector with excellent fundamentals. I think 10 years down the road, the fundamentals on this business could be much better than they are today.
Second, ESG investing mandates are a real thing. These secular tailwinds are not just a fad. I think we’re going to see capital inflows into this sector continue to surge for decades to come. Indeed, this is a very positive backdrop for investors looking for well-positioned renewables plays like Algonquin right now.
Income and safety driven by regulated utilities business
Algonquin’s growth overlay is very nice. However, I think the company’s underlying regulated utilities business (which makes up the majority of its revenue) is attractive as well. This business provides the income and defensiveness component I think are critical for investors looking to hold this stock into retirement.
Indeed, Algonquin’s dividend yield of 3.5% isn’t anything to write home about. That said, this yield is bond-like. Algonquin’s core business provides cash flows which are about as stable as one could ever hope for. These cash flows support this current yield along with long-term dividend increases over time. I anticipate Algonquin will continue to hike its dividend yield in the mid- to high-single digit range long term.
The income and safety Algonquin provides really elevates this renewables stock to the top of my list. Accordingly, I don’t think many companies really compare to Algonquin right now in the utilities space on the basis of quality. This is a best-in-class stock for those looking to buy and hold for a few decades.