There’s no doubt that Algonquin Power and Utilities (TSX: AQN) stock has been one of the most popular Canadian stocks in recent months after its massive sell-off in the second half of 2022.
Algonquin now trades almost 50% off its 52-week high, which is a significant deal for any kind of stock, but especially for a utility company, some of the safest investments you can buy.
Investors are both perplexed about how the stock has sold off but are also interested in buying some shares as a massive discount like this presents investors with the opportunity to buy the stock while it’s cheap. However, as savvy investors know, it’s only worth an investment if it can turn its business around.
So if you’re interested in Algonquin stock, here are five things to know about the ultra-cheap utility stock in February 2023.
Algonquin owns both utilities and renewable energy assets
Algonquin Power and Utilities has always been an intriguing stock for investors because it owns an attractive mix of utility operations and green energy-generating assets.
Utilities are some of the lowest-risk businesses you can buy since the water, gas or electricity services they provide are so essential for their residential and commercial customers. Furthermore, governments regulate these assets, ensuring adequate return on equity for investors.
Their low-risk nature means that utility assets often have highly predictable revenue and cash flow, which is why these are some of the safest investments you can make.
Green energy is also a high-quality industry to invest in. There is significant long-term demand for green energy, plus the companies that run these assets, such as Algonquin, often sign long-term power purchase agreements to minimize risk.
Algonquin assets are diversified all across North America
Another attractive feature of Algonquin stock’s business and portfolio of assets is that these businesses are spread across North America.
Its utility assets, for example, are located in 13 U.S. states and one Canadian province, plus Algonquin has assets in Bermuda and Chile.
Meanwhile, the utility owns 41 renewable and clean energy facilities across North America, totalling over $6 billion in assets.
Therefore, not only does it own low-risk assets, but it has diversified its operations well to help reduce risk even further.
Algonquin stock just cut its dividend
Despite Algonquin being a low-risk utility stock and having a well-diversified portfolio of assets, it has faced some major roadblocks in recent months, causing a major sell-off in the market and requiring the company to trim its dividend.
Much of Algonquin’s growth over the past few years has come from issuing new debt. From the end of 2019 to Algonquin’s most recent quarter, its long-term debt has nearly doubled.
So as interest rates began to rise rapidly and Algonquin’s interest payments increased, it has faced some significant headwinds.
However, now that Algonquin’s quarterly dividend has been cut by 40% and its share price has sold off by almost 50%, the stock looks to be in much better shape going forward.
The new dividend is expected to be just 75% of its earnings per share (EPS) in 2023, making it much safer.
After its recent sell-off, the stock now trades at a P/E ratio of 13.3 times
Algonquin’s sell-off has been significant, and although it has made many investors cautious about investing in it, the discount it offers can’t be ignored.
With Algonquin trading just over $10 a share, the stock now trades at a forward price-to-earnings ratio of just 13.3 times, according to the midpoint of its 2023 EPS guidance.
That may seem like it’s still slightly high, but for a utility stock, it’s an attractive valuation and makes Algonquin cheaper than essentially every other utility stock in Canada.
Algonquin stock’s new dividend offers a yield of 5.6%
Although Algonquin cut its dividend by 40%, because the stock has sold off so significantly, it continues to offer investors an attractive dividend yield.
Furthermore, Algonquin remains committed to achieving long-term growth, increasing both its share price and dividend for investors over the long run.
So if you’re interested in buying Algonquin, the stock is in a much better position now that it has sold off. Considering it still offers a dividend yield of roughly 5.6%, it’s an ideal stock to buy for passive income.
