Shares of Canada-based utility giant Algonquin Power & Utilities (TSX: AQN) slumped over 50% in 2022. AQN stock is currently trading 51% below all-time highs, valuing the company at a market cap of $7.5 billion.
Let’s see if the TSX dividend stock is a good contrarian buy right now.
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Why did AQN stock fall 50% last year?
A major reason for AQN’s decline in share prices can be attributed to its significant dividend cut. In late 2022, Algonquin’s management lowered its dividends by 40%, which shocked investors, driving share prices lower.
Algonquin Power & Utilities is wrestling with higher interest rates as debt levels have risen by 87% in the last three years. Its debt-to-equity ratio has also surged from less than 1 time in July 2020 to 1.4 times in July 2023. AQN’s times interest earned ratio has also fallen from over 12 times to 1 in this period.
This ratio allows investors to analyze the company’s ability to cover interest costs, and a higher multiple is favourable.
Its adjusted earnings per share are forecast to narrow from $0.96 per share in 2022 to $0.76 per share in 2023. The company currently pays investors a dividend of $0.58 per share, indicating a dividend yield of 5.5%.
In addition to a cut in dividends, AQN also disclosed plans to sell assets and lower balance sheet debt.
What’s next for AQN stock price and valuation?
In October 2021, Algonquin Power & Utilities announced plans to acquire Kentucky Power for US$2.8 billion, which included US$1.2 billion in debt. But the deal failed to materialize, which might not be a bad outcome for the company, given its deteriorating financials.
AQN also initiated a strategic review of its renewable energy group in order to enhance shareholder value. In a press release, Arun Banskota, President and CEO of AQN stated, “Both our Renewable Energy Group and our Regulated Services Group have grown into strong businesses, with scale and high-quality assets, and are positioned to benefit from the energy transition.”
According to Banskota, the review will enable the company to achieve a lower cost of capital, the details of which will be provided in the upcoming earnings call.
Is AQN stock a buy right now?
In Q1 of 2023, Algonquin Power reported sales of $778.6 million, an increase of 6% year over year. However, its adjusted funds from operations fell by 4% to $210.9 million.
AQN explained it reported an increase in operating profits in its regulated business due to constructive rate case outcomes. Moreover, it advanced pipeline projects in the renewable business, which were in line with estimates.
AQN expects to spend $1 billion in capital expenditures in 2023. Around $700 million will be allocated toward the regulated business and the rest toward renewables.
AQN stock is priced at 13 times forward earnings, which is not too steep. But the company has to keep generating cash flows and service its high-yielding debt at a consistent pace to renew investor confidence.
AQN stock is currently trading at a discount of 13.5% to consensus price target estimates. After accounting for dividends, total returns will be closer to 19%.
