Algonquin Power & Utilities (TSX:AQN) was founded in 1988 and has since grown its assets to almost US$18 billion. Its regulated utilities in electric, natural gas, or water and wastewater across 16 jurisdictions make up approximately 70% of its operations. The remainder of its portfolio is renewable assets from wind, solar, and hydro power.
Economic contraction weighing on AQN stock
About 75% of the utility’s revenues are from the United States. The U.S. is already technically in a recession, which weighs on stocks in general, including AQN stock. A recession is defined as two consecutive quarters of gross domestic product (GDP) decline. Notably, so far, this recession has been mild with GDP declines of 1.6% and 0.6% for the two quarters.
Year to date, the TSX stock has fallen more than 21% at writing. Below is a chart showing AQN stock’s price action.
This price action is already helped by a stronger U.S. dollar versus the Canadian dollar. On the NYSE, AQN stock price’s year-to-date decline is more than 27% at writing.
Rising interest rates pressuring AQN
Central banks are able to increase short-term interest rates as a tool to cool high inflation. This will also dampen economic growth and discourage business investment. Utilities inherently have debt-heavy balance sheets. At the end of the second quarter, Algonquin had long-term debt of under US$7.3 billion and a long-term debt-to-equity ratio of 1.3 versus a ratio of 0.88 at the end of 2019. The higher debt levels in a rising interest rate environment make AQN stock a riskier investment than before.
AQN stock has a track record of paying solid dividends
AQN stock has paid increasing dividends for the 11th consecutive year this year. Its 10-year dividend-growth rate is 9.5%, which is relatively high in the utility space. As a relatively small utility, the dividend stock should continue to provide above-average growth. Its current yield of almost 6.9% is compelling.
Here’s where AQN stock’s growth will come from
Algonquin has a capital plan of US$12.4 billion from 2022 through 2026. It does not make sense for the stock to push out equity now, because its stock price has come down. Capital has become scarce in the financial markets.
Management is setting up asset recycling that it expects to raise approximately US$277 million and CA$107 million across the sale of partial interests in three wind facilities. The press release stated, “AQN will continue to oversee day-to-day operations and provide management services to the facilities.” Management expects to close this transaction by the end of 2022 and, therefore, won’t need to issue any equity for now.
Algonquin is also in the process of acquiring Kentucky Power for an enterprise value of US$2.65 billion, which is US$200 million cheaper than before. Kentucky Power will increase AQN’s regulated electric utilities to almost 80% of AQN’s business, which should improve the stability of AQN’s business performance. This transaction is still subject to the U.S. Federal Energy Regulatory Commission approval. If things go smoothly, the acquisition is estimated to complete in January.
Analysts are bullish on AQN stock
The depressed stock trades at an attractive valuation from a long-term perspective. Therefore, analysts are largely bullish on AQN stock. The 12-month analyst consensus price target is US$15, which represents a meaningful discount of close to 30%. Given the current market environment, though, stocks will generally be depressed. So, investors should not expect a quick turnaround in the stock.
The Foolish investor takeaway
Much of the AQN stock decline is attributable to the macro environment — an economic contraction and rising interest rates. This macro environment has been pressuring stocks in general — not just AQN stock. The utility stock has a track record of increasing its dividend and its current yield is absolutely attractive. It also has a multi-year capital plan to deliver above-average growth. Interested investors should consider building a position for long-term investment.
