Algonquin Power & Utilities (TSX: AQN) is among the most popular stocks on the TSX. Trading at a market cap of $6 billion and an enterprise value of $17.3 billion, AQN is a renewable energy and utility company.
Its regulated services business provides a portfolio of rate-regulated water, electricity, and gas utility services. Further, the renewable energy business generates and sells electrical energy produced by renewable power-generation facilities in Canada and the United States. AQN owns and operates hydro, wind, solar, renewable, natural gas, and thermal facilities.
The double whammy of rising interest rates and inflation has dragged shares of the TSX stock lower by 61% from all-time highs. As AQN is part of a capital-intensive sector, rising debt costs meant the company was unable to service interest payments, resulting in a dividend cut in early 2023, making investors extremely nervous.
Despite a lower dividend, it pays shareholders an annual dividend of $0.60 per share, indicating a yield of 6.9%, which is still quite attractive. Let’s see if it makes sense to buy and hold shares of Algonquin Power & Utilities right now.
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An overview of AQN
Through its operating business called Liberty, Algonquin Power & Utilities provides regulated water, electricity, and natural gas utility services to more than 1.2 million customer connections in North America. Its widening portfolio of clean energy assets represents roughly four gigawatts of renewables in operation and under construction.
However, to lower its balance sheet debt and improve its financial flexibility, AQN is looking to offload its renewable energy business. According to the company, the sales will help it support an investment-grade credit rating while optimizing its credit structure.
During AQN’s third-quarter (Q3) earnings call, its interim chief executive officer Chris Huskilson explained, “We own a sizable fleet of high-quality renewable assets and an extensive development pipeline, and by no means will our assets be sold at a fire sale price.”
How did AQN perform in Q3 of 2023?
Algonquin Power & Utilities increased net earnings by 7.9% year over year in Q3. But after adjusting for non-recurring costs and inflows, earnings were flat compared to the year-ago period. Its interest expense stood at $94.2 million, rising $19.2 million compared to the prior-year quarter. A third of the expenses rose to fund the company’s growth, while the rest were due to an increase in interest rates on variable-rate borrowings.
Algonquin Power & Utilities was recently awarded two grants by the Department of Energy (DOE) for its regulated business. These grants should help AQN accelerate grid modernization investments while reducing the impact on customer affordability. It is one of four regulated utilities to secure the two awards.
The grants will enable AQN to invest in capital expenditures and increase its financial flexibility in the near term.
The Foolish takeaway
There are a lot of uncertainties surrounding AQN right now, given interest rates remain elevated and the sale of its renewable energy business. While AQN stock trades at 12 times forward earnings, its adjusted earnings are forecast to narrow from $0.96 per share in 2022 to $0.74 per share in 2024. However, analysts remain bullish on the TSX stock and expect shares to surge over 15% in the next 12 months.
