Algonquin Power & Utilities Stock: Is it Finally a Buy?

Algonquin Power & Utilities (TSX:AQN) stock crashed last year, but could it be a buy now?

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Algonquin Power & Utilities (TSX:AQN) stock was one of the TSX’s big losers in 2022. Over the course of the year, the stock fell 46%, when the index as a whole only fell 6%. That’s 40% underperformance!

Clearly, Algonquin stock had a rough year in 2022. High interest rates took a bite out of the company’s earnings. As a utility, AQN has high levels of debt and high interest payments. When the Bank of Canada raised interest rates last year, it had the effect of making AQN’s debt more expensive, eating into earnings.

That was then. This is now. At today’s prices, AQN stock has a 5% dividend yield, which is well above average for the TSX index. It certainly looks enticing, but is AQN stock really a good buy today? In the ensuing paragraphs, I will explore that topic and attempt to arrive at a conclusion.

Why Algonquin stock crashed

Before we can understand whether AQN stock is cheap today, we need to know why it crashed in the first place. The stock crashed primarily because of a poor earnings release for the third quarter of 2022. Metrics included the following:

  • $666 million in revenue, up 26%
  • -$195 million in net earnings
  • $102.9 billion in cash from operations, down 41%
  • $73.5 million in adjusted net earnings, down 25%
  • $276 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), up 10%

The revenue and adjusted EBITDA numbers look good, but remember that revenue isn’t a profit metric, and adjusted EBITDA is very easy to manipulate, as it isn’t governed by any accounting rules.

Part of the reason why Algonquin’s loss was so big was because of high interest rates. Interest expense surged by $28 million in the quarter, which explains part of the loss. It doesn’t explain the whole loss, but it was a big contributor.

Thanks to its net loss, Algonquin slashed its dividend, which led to the stock selling off dramatically the day after the release came out. At one point, the stock was down 16% in a single day! Since then, it has recovered, up 32.44% from its 52-week low.

What has changed since then?

Since AQN’s third-quarter earnings release came out, many things have changed. For one thing, Algonquin put out another earnings release, which was much improved from the third-quarter release:

  • $748 million in revenue, up 26%
  • -$74 million in net income, down from a positive figure
  • $151 million in adjusted net earnings, up 10%
  • $214.6 million in cash from operations, up 70%
  • $358 million in adjusted EBITDA, up 20%

Overall, this was a much better showing than the third quarter, although earnings remained negative. It’s also worth noting that Algonquin is still paying dividends while having negative earnings. The payout ratio using adjusted earnings is relatively high, which isn’t a good thing. On the plus side, Algonquin’s growth is very strong, which isn’t typical for the utilities industry. I would say that I’m pretty much neutral on this stock. The company’s picture is improving, but it still looks, based on GAAP (generally accepted accounting principles) earnings, like the dividend could be cut again.

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 Andrew Button 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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