Algonquin Power & Utilities (TSX: AQN) is a Canada-based renewable energy and utility company. With $17.6 billion of assets, AQN stock is valued at $6.91 billion by market cap. It has delivered energy and water solutions for more than three decades through its operating business known as Liberty.
Algonquin Power & Utilities provides regulated electricity, water, and natural gas utility services to more than 1.2 million customer connections in North America. Its growing portfolio of renewable wind, solar, hydro, and thermal power-generation facilities represents over 3.9 gigawatts of renewable generation capacity in operation and under construction.
Regulated cash flows allowed AQN to increase quarterly dividends from $0.07 per share in 2012 to $0.246 per share in December 2022. But recent interest hikes and high balance sheet debt resulted in lower profit margins for AQN, forcing it to reduce payouts by 40% to $0.144 per share in June 2023, driving share prices lower by 56% from all-time highs.
Despite the 40% dividend cut, Algonquin Power & Utilities offers shareholders a tasty dividend yield of 6%. Let’s see if you should buy AQN stock at its current multiple and for its attractive yield.
Algonquin Power & Utilities is selling its renewable business
Algonquin Power recently disclosed it is looking to offload its renewable business, making it a pure-play regulated utility. The company believes a simplified structure will help it focus on the lower-risk regulated business with greater operational efficiency and capital discipline.
The renewables business generates a third of total earnings for AQN, which suggests the dividend payout might move lower once the sale is completed. Algonquin Power explained it will use the proceeds of the sale to reduce debt and fund share buybacks.
It also emphasized the deal will help it support current dividends, reduce the cost of capital, and help maintain an investment-grade credit rating of BBB.
AQN ended the second quarter (Q2) with more than $8 billion in debt, indicating a debt-to-equity ratio of 113%, making investors nervous.
What’s next for AQN stock price and investors?
Algonquin Power stated its regulated utility business is positioned for organic growth. Its differentiated portfolio reduces risk and provides opportunity through geographic, regulatory, and modality diversification.
AQN is also poised to benefit from opportunities to modernize its infrastructure, improve customer outcomes, and prepare systems for electrification. Its U.S.-focused business ended Q2 with a rate base of $7 billion, a majority of which is concentrated in four states, providing it with expansion opportunities south of the border.
AQN forecasts to spend $1 billion in annual capital expenditures, which should help increase adjusted earnings between 4% and 7% annually, driving cash flows and dividends higher.
AQN aims to grow the rate base organically at affordable customer rates. Its focus on cost efficiencies should create upside investment opportunities and result in improved earnings in the future.
But for investors to regain confidence, AQN needs to reduce debt significantly. It increases sales by 4% in the first six months of 2023. But its earnings before interest, tax, depreciation, and amortization remained flat, while net earnings were down 30% due to interest expenses and higher costs.
