Better Buy: Algonquin Power Stock or Fortis Stock?

Algonquin Power and Fortis are rebounding off their 12-month lows. Is one still undervalued?

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Algonquin Power (TSX:AQN) and Fortis (TSX:FTS) saw their share prices plunge last year due to a variety of factors. Bargain hunters are returning to these TSX stocks, and those who missed the recent bounce are wondering if one is still undervalued and good to buy for a self-directed portfolio targeting total returns.

Algonquin Power

Algonquin Power just announced that it is terminating its planned acquisition of Kentucky Power. The deal was originally agreed in late 2021, but the market has since had concerns about how Algonquin Power would come up with the US$2.85 billion to conclude the purchase.

In September last year, the company announced a revised price of US$2.6 billion, but the deal ran into regulatory issues and has been in trouble for months.

Steep interest rate increases and weaker revenues in 2022 created additional challenges. Algonquin Power’s chief financial officer left the company suddenly at the end of August last year. In hindsight, that should have been a big warning sign for investors.

The stock trended lower through September and October before plunging in November after the company reported a US$195 million loss for the third quarter (Q3) of 2022 and reduced guidance for the year and for 2023. In January, management announced a 40% dividend cut and the firm plans to monetize $1 billion in assets.

On the positive side, the stock has trended higher over the past three months. Algonquin Power hit its revised target in Q4 2022 and finished the year with US$475 million in adjusted net earnings, up about 6% from 2021.

At the time of writing, AQN stock provides a 5% dividend yield. The board had increased the payout by about 10% per year for a decade until 2021 and even bumped the distribution by another 6% in the spring of 2022 before getting caught out by the rate hikes. Setbacks are frustrating for investors, but Algonquin Power’s management team has a good track record of delivering growth over the long run.

The reduced distribution should be safe, and the market could start to push the share price higher now that the Kentucky Power uncertainty has ended.

Fortis

Many Algonquin Power investors hope that the company will become the next Fortis.

Fortis has successfully grown through a combination of strategic acquisitions and internal projects to become a significant utility player in Canada, the United States, and the Caribbean with $64 billion in assets that include power-generation sites, electricity transmission networks, and natural gas distribution utilities.

Fortis increased its dividend in each of the past 49 years and plans to boost the payout by at least 4% annually through 2027, supported by the current $22.3 billion capital program.

FTS stock is up more than 20% from the 12-month low it hit in October but is still down about 6% over the past year. At the time of writing, the stock provides a 3.8% yield.

Is one good to buy today?

At this point, I would probably make Algonquin Power the first choice for a portfolio focused on total returns. The company still has some work to do to get back on track and regain investor trust, but the stock appears undervalued, and it wouldn’t be a surprise to see Algonquin Power become a takeover target.

Fortis remains attractive as an anchor pick for a buy-and-hold portfolio. However, the easy money has likely already been made on the stock.

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 recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Algonquin Power.

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