Algonquin Stock Has Broken Investors’ Hearts, but I Think It Will Turn a Corner

AQN stock faces more uncertainty in 2023, but could be a compelling value pickup for income investors.

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Algonquin Power & Utilities (TSX:AQN) stock likely broke a lot of income investors‘ hearts when it was forced to reduce its dividend earlier this month following a full year of headwinds. Depending on where you look, shares of Algonquin are likely to show the old dividend yield (of around 10%). After the fresh cut, the quarterly dividend now lies at $0.1085 per common share, down from $0.1808, representing a dividend cut of 40%.

Indeed, higher interest rates weighed heavily on capital-intensive utility plays. For those with a big stake in Algonquin, last year may have come as an unpleasant surprise, given the blue-chip nature of the name.

It wasn’t even the 40% dividend reduction that hurts the most for shareholders hanging in there. The stock collapsed, now down around 44% over the past year alone and more than 56% off its all-time highs of $22 and change per share.

Algonquin stock: A fresh slate from here?

At $9 and change, Algonquin is in a huge rut. The path behind is quite ugly. But as investors, it’s our job to look at the road ahead and the current valuation.

At these depths, I think the risk/reward is attractive for those looking to get in for the first time. Though the renewable powerhouse known for its capital gains and juicy dividend has likely caused many to part ways for good, younger investors with the patience to let the company find its footing again may stand to be the most richly rewarded.

With lowered expectations and a management team with a lot to prove to win back the hearts of investors, I do think Algonquin could be one of the comeback heroes of 2023. That said, don’t expect a return to new highs anytime soon. I think it could take at least five years to regain ground lost over the past year or so.

Algonquin stock slapped with lower expectations, downgrades and more

With analysts lowering their price targets, Algonquin has an opportunity to leap-frog past estimates at some point in the near future. On the EPS front, Algonquin missed in two of the last four quarters. The latest miss saw EPS of $0.11 against a $0.17 consensus, while the Q4 2021 miss was by a mere penny.

The latest Investor Day did not do much to change the course of the stock. We have a bit more clarity on what to expect from Algonquin from here. Though various pundits, including iA Capital Markets’ Naji Baydoun think “more could be required” after a disastrous 2022.

Specifically, Baydoun wants to see the firm walk away from its Kentucky transaction and other details regarding funding. For now, Baydoun has a modest $10 price target on the name.

The bottom line on AQN stock

It will take a lot for Algonquin to win back the love of investors it lost over the past year. While there are still numerous unknowns on where the firm goes from here, I do think the rewards could be sizeable if Algonquin can execute and turn things around. The big dividend cut leaves Algonquin with more financial flexibility, but unless we’re in for a Fed pivot, don’t expect a spike in AQN stock anytime soon.

Algonquin’s a cheap, albeit slightly less bountiful dividend play.

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 Joey Frenette 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.

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