Should You Buy Algonquin Stock Now or Wait?

Algonquin Power stock has a massive 9.8% dividend yield today! Is now the time to buy or should income investors wait?

| More on:
Electricity high voltage pole and sky

Image source: Getty Images

Algonquin Power and Utilities (TSX:AQN) stock has been absolutely battered in 2022. It is incredibly unusual for a once-considered safe utility to fall by over 40% in the span of one year. However, ever since it announced worse-than-expected third-quarter results, its stock has drastically collapsed, and now it has flat lined.

Why is Algonquin stock down so much in 2022?

The company has long endorsed a faster-than-average growth plan (at least for a utility). At its 2021 Investor Day, Algonquin promoted 7-9% annual adjusted earnings-per-share growth for the coming five years.

However, after several project delays and a higher-than-anticipated levels of floating rate debt, third-quarter earnings were consumed by rising costs. Algonquin was forced to lower its 2022 guidance and noted that it may amend its longer-term growth forecast.

This has left current and prospective investors wondering what to do. Here are some points that are both for and against buying the stock. Ultimately, the decision to buy, sell, or hold will have to be based on your level of risk tolerance, patience, and contrarianism.

Why Algonquin stock could be interesting

For investors willing to take on some serious risk, Algonquin stock could be interesting. Firstly, it is very cheap today. It trades for around 10 times earnings, where many utilities are trading with mid-teens earnings multiples. It has a portfolio of very good assets and has a good long-term history of market-leading returns.

Secondly, its dividend yield of 9.9% could seem very attractive. Now, I say this with a high level of skepticism. Other than the March 2020 market crash, I have almost never seen a stock sustain a dividend yield over 8% for a long period.

The market is pricing a dividend cut and often the market is right on these things. If you buy this stock, it should be as a contrarian value play, not as an income investment. Right now, the company is not sustaining the dividend by earnings or cash flow, so its dividend payout is very speculative.

Now, keep in mind, Algonquin management just bought over $1 million of stock. Insider buying is often a bullish signal, indicating that management may not be as concerned, as the market appears to be. However, there are still more reasons to be cautious.

Why you should wait

If the current debt/operating issues persist (and earnings further decline), Algonquin may have to take drastic measures to shore up its balance sheet. This could include selling off prime assets, refinancing debt, issuing more equity (at a very inopportune time/low price), or reducing its dividend.

Algonquin already has a lot of debt (net debt to earnings before interest, taxes, depreciation, and amortization of 8.5 times). It will have to take on more floating rate debt to finance the Kentucky Power acquisition. This could further hamper earnings and may even lead to a credit re-rating, which would further increase its cost to borrow.

Overall, the balance sheet risks make the stock very speculative. Macro-economic issues are only expected to get worse next year, so that is also weighing on the stock.

Play it safe and stay on the sidelines

While this is a worst-case scenario, it is one reason the market is so skittish on Algonquin stock. Given the risks, there are just too many factors that could go wrong for its business today. As a result, it is not the safest bet, especially if you are buying it for dividend income.

Algonquin will be having an Investor Day in the next few months. This may provide some better insight into Algonquin’s plan going forward. I would wait until then before making a further decision to buy or hold on.

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

More on Dividend Stocks

Dividend Stocks

TFSA: How to Invest $88,000 to Get $5,450/Year in Passive Income

Top TSX dividend stocks such as Enbridge can be held in your TFSA to benefit from steady payouts and capital…

Read more »

edit Sale sign, value, discount
Dividend Stocks

3 Cheap Dividend Stocks (Down Over 30%) to Buy in January 2023

Given their discounted stock prices and high yields, these three cheap dividend stocks could be attractive for income-seeking investors.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

TFSA Investors: Earn Passive Income With 3 Blue-Chip Stocks

TFSA investors can worry less about a recession and earn passive income with three blue-chip stocks as core holdings.

Read more »

Hourglass projecting a dollar sign as shadow
Dividend Stocks

Is Now the Right Time to Buy Consumer Discretionary Stocks?

Investors cannot paint consumer discretionary stocks with a wide brush. Each stock must be investigated individually. Here's why.

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Ultra-Stable Canadian Stocks Just Crowned as Dividend Aristocrats for 2023

Waste Connections (TSX:WCN) stock and another Dividend Aristocrat could help investors crush the markets in 2023.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Create $200 in Passive Income Every Quarter From 1 Defensive Stock

Risk-averse investors can seek safety in a defensive stock and earn more in passive income in 2023 and beyond.

Read more »

railroad
Dividend Stocks

Slow and Steady: Buy this Railroad Stock Now to Win the Race

Investors looking for a solid and growing income should pick up shares in this railroad.

Read more »

retirees and finances
Dividend Stocks

RRSP Investors: Should You be Worried During a Recession?

RRSP savers might feel like gagging as they watch their investments fall, but stay strong! Especially with these TSX stocks.

Read more »