Advisor Commentary: Should You Buy Algonquin Power Stock? [PREMIUM]

Declines of this magnitude aren’t generally found in utility-land, and it behooves us to have a peek.

| More on:
golden sunset in crude oil refinery with pipeline system

Source: Getty Images

The analyst team I work with at Stock Advisor Canada has never been too keen on utility companies. Throughout the majority of our nine years working together, there have been better opportunities elsewhere — plenty of them.

To be sure, we’re not entirely averse to the sector. It’s just that the nature of it doesn’t lend itself to outsized opportunities surfacing very often. This is where Algonquin Power (TSX:AQN) enters the fray today. It’s a company that, on the surface, fits the profile of a “typical” steady utility. But because of an earnings report that sent its investors scurrying, the company’s shares have dropped 33% in a few short weeks.

Declines of this magnitude aren’t generally found in utility-land, and it behooves us to have a peak.

Algonquin Has a Huge Dividend Yield Right Now

Utilities are generally considered for their income first. Any growth beyond that serves as gravy. And thanks to the haircut the stock price has received, Algonquin’s annual payout of $0.98 per share equates to a dividend yield of 9.6%. That’s attractive and has the potential to, on its own, provide a market-beating return over the next five years.

But …

The thing is, there’s little that suggests this dividend is even real. Check out the company’s cash flow profile tabled below and compare it to the annual dividend obligation the company faces.

20172018201920202021LTM
Cash from operations$326.6$530.4$611.3$505.2$157.5$531
Capital expenditures$565.1$466.4$581.3$786$1,345$1,191.1
Free cash flow-$238.5$64$30-$280.8-$1,187.5-$660.1
Dividend obligation$127.5$166.4$196.4$253.8$307.1$366.1
In millions. Source: S&P Global Market Intelligence

Based on that profile, and given consistently negative free cash flow, Algonquin shouldn’t even pay a dividend. This is a very capital-intense business, and it’s heavily reliant upon external sources of financing, debt and equity, to fuel its operations — even more so given the dividend obligation. Though not necessarily affordable, the dividend then is somewhat of a carrot to keep the equity financing channel open.

To be sure, this relationship works — not only for Algonquin but also many in the utility (and pipeline) sector. The problem for Algonquin is that, as mentioned, we have a stock price that’s 33% lower than it was. Equity financing just got a whole bunch more expensive. In addition, interest rates are higher. Future debt financing is likely to be more expensive as well. Combined, this dividend becomes even less affordable than it was.

If you’re hunting for utilities, or dividend income in general, we at Stock Advisor Canada suggest there are probably better ones out there to consider than Algonquin.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »