Algonquin Power & Utilities (TSX: AQN) has had quite a difficult time returning to normalcy after it dropped into oblivion as of late. Unfortunately, shares fell further this week, as the company announced its third-quarter earnings.
Yet even still, is there enough on the horizon to consider Algonquin stock a buy these days — especially with a 7.68% dividend yield to consider as of writing? Let’s take a look at the TSX today.
Source: Getty Images
Earnings beat
During the third-quarter earnings report, Algonquin stock reported an improvement, but perhaps not enough to interest investors. The company reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of US$281.3 million, up 2% year over year. Further, adjusted net earnings came in up 8% year over year to US$79.3 million.
While this was positive, there were still some problems. Revenue dropped 6% year over year to US$624.7 million, with adjusted funds from operations (FFO) down 17% year over year. Furthermore, dividends per common share were down a whopping 40%. Yet the sale of its renewable assets should create more cash flow, according to management.
“We have launched the sale process for our portfolio of high-quality renewable assets and extensive development pipeline, and we remain focused on appropriate valuation,” said Chris Huskilson, interim chief executive officer of AQN. “With regards to the quarter, we continued to see constructive growth from rate cases and new development projects year over year. However, we also saw those efforts partially offset by unfavourable weather and higher interest rates.”
More improvement to come?
New rates and recovery investments were implemented by the company to help offset the lower revenue for the third quarter. However, unfavourable weather put a stop to this, with wind production hurting the company’s Empire Electric renewable assets.
Furthermore, interest expenses grew by US$19.2 million year over year, with about one-third of the increase from funding of capital. This was deployed back in the second half of 2022 and the first half of this year. The remaining two-thirds came from the increase in interest rates.
All in all, there are a lot of storms gathering clouds around Algonquin stock. While there were some mild improvements, it still looks like the stock has a lot of foul weather to follow. So, is there an end in sight?
What to consider
I like to look at fundamentals at a time like this. Looking at the price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, enterprise value over EBITDA (EV/EBITDA), and debt-to-equity (D/E) ratio all spell out where this stock could be headed.
In the case of Algonquin stock, it holds a trailing P/E ratio of 110.99, making its share price far higher than its earnings. Its P/S ratio is lower, however, at 1.6, with its EV/EBITDA also expensive at 41.05. Furthermore, its D/E ratio is at 113%, meaning it would take 113% of its equity (as in, all of it and then some) to pay off its debts.
So, that dividend is not safe. No matter how high a dividend is, it’s important to look at the fundamentals. And in the case of Algonquin stock, it’s one I would sit on the sidelines of for now.
