Algonquin Power & Utilities (TSX:AQN) is a utility company involved in the transmission and distribution of electricity, water, and natural gas across North America. Additionally, it is engaged in the production of renewable energy. AQN looks like a safe, stable, and diversified stock to dip into.
Utility companies are usually defensive and less susceptible to market volatility. However, AQN stock has witnessed substantial selling over the last few months, losing over 40% of its stock value since November. Its weak third-quarter performance and rising interest rates have weighed on Algonquin’s stock price. After hitting an eight-year low on December 29th, AQN is only trading 3% higher from that level.
Let’s assess whether the downward momentum in the stock price could continue or if investors should start accumulating the stock.
First, let’s look at its third-quarter performance in more detail.
AQN’s third-quarter performance
In the September-ending quarter, Algonquin posted revenue of US$666.7 million, representing a 26% increase from the previous year’s quarter. The contribution from its recently acquired New York American Water Company, favourable rate revisions, new facility additions, and ability to pass on the increase in prices to its customers drove its top line. However, the decline in production from its wind facilities and unfavourable currency translation offset some of the increases.
Despite the revenue growth, the company reported a net loss of US$195.2 million compared to US$27.9 million in the year-ago quarter. The changes in the value of its investments, higher interest expenses amid rising interest rates, and increased depreciation expenses weighed on its earnings. Meanwhile, removing special items, its adjusted EPS (earnings per share) came in at $0.11, a decline of 26.7% from its previous year’s quarter.
Though adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) increased by 9.6% to US$276.1 million. AQN closed the quarter with liquidity of US$2.18 billion.
Amid the challenging macroeconomic conditions, delay in the completion of its renewable energy facilities, and expectation of delayed price revisions, AQN’s management lowered its 2022 EPS guidance from US$0.72–US$0.77 to US$0.66–US$0.69. Meanwhile, the company has announced it will continue with its efforts to acquire Kentucky Power Company and Kentucky Transmission Company.
However, the company is also working on selling assets worth US$1 billion, with the proceeds utilized to reduce its debt levels. Further, management expects its 2023 adjusted EPS, excluding the gains or losses from asset sales, to come in the range of US$0.55–US$0.61. The midpoint of the guidance represents a decline of 14% from its 2022 guidance.
In this challenging environment, Algonquin management has announced a lowering of its quarterly dividend from US$0.1808/share to US$0.1085/share. Despite slashing its dividend, AQN’s dividend yield for the next 12 months stands at a healthy 6.52%.
The steep correction in AQN has dragged its valuation down to attractive levels. The stock is trading at 11.2 times its projected earnings for the next four quarters. With around 80% of its asset base focused on its regulated utility business, the company’s financials are stable and predictable. So, despite the near-term volatility and slashing of dividends, I believe investors with an over three-year investment horizon can start accumulating the stock. At an attractive valuation, they get the earnings predictability of a stable utility business and high dividend yield.