Algonquin Power & Utilities Corp (TSX:AQN) has been one of the worst performing TSX utility stocks over the last 12 months. In that period, it has fallen 17.3%, while the TSX utilities sub-index has merely fallen 11.8%. Algonquin has underperformed by a wide margin. However, as a result of it having fallen so much, the stock now has a truly juicy 7.7% dividend yield. If the company can ‘get its groove back,’ then current shareholders will be handsomely rewarded. In this article, I will explore AQN’s prospects of righting its ship and returning the amount of wealth to shareholders that its current dividend yield implies it will.
Why AQN stock crashed this year
The reason why Algonquin stock crashed this year is because it performed poorly as a business, and cut its dividend. In Q3, the company showed declining earnings. In Q4, the company delivered more lacklustre earnings and cut its dividend. The full year delivered the customary growth in revenue and cash from operations (CFO) that investors have become accustomed to. However, earnings were negative to the tune of $212 million.
Here I speak of the portion of earnings owned by shareholders, “net income available to common shareholders.” That declined, mainly due to a $150 million asset impairment and $75 million decline in the fair value of assets. A $69 million increase in interest expenses was a factor too, although I do not think it was as big of a factor as it was made out to be in the company’s Q3 2022 earnings results. Close to all utilities saw interest expenses increase last year, if any didn’t it was because their debt was fixed rate and didn’t have to be refinanced. The $69 million increase in interest expenses was not that big of a factor. Granted, it was a large increase in interest expense itself: that category was up 33% in 2022 (‘up’ as in further from zero, an expense account going up in this sense is bad). But it wasn’t any bigger than the average utility company‘s increase in interest expenses last year.
Where did the asset impairment charge come from? According to the company’s press release, it pertained to four Texas wind farms. The fact that these assets were impaired means that AQN’s accountants think that the firm will never earn back what it paid for them. The accountants made this choice because of declining energy prices in Texas. If the accountants turn out to be wrong then Algonquin’s expected future earnings will go beyond that which is implied by the book value of these assets. So, the impairment in itself doesn’t mean much. It only means something if the accountants’ forecast is right.
Why it could rally in the coming year
The reason why Algonquin could rally in the coming year is because the company offers a very high dividend yield. Dividend investors like big yields; AQN has yield in spades, and its payout ratio (87%) is below the earnings level. Dividend-oriented investors chasing yield could make this stock rally in the year ahead. Additionally, the company’s cash from operations was actually positive in 2022, and in the trailing 12-month period. The money to pay dividends with is certainly there. So I would not be surprised at all if this 7.7% yielder trading at a 10.4 P/E ratio rallies in the year ahead.
