It’s been an incredibly difficult few years for Algonquin Power & Utilities (TSX: AQN). Shares of the company plummeted after cutting its dividend back in early 2023. But recently, shares came back up after the company managed to put out a profit. Shares shot up for Algonquin stock by as much as 5% after earnings. So, let’s see what happened to make the stock fall in the first place and if earnings could signal a turnaround.
What happened?
The drop in share price came as Algonquin stock tackled rising interest rates, with a significant amount of debt held at variable rates. So, as rates rose, the company’s interest expenses surged. And this all put a strain on the stock’s cash flow.
There was quite a low amount of cash flow back in 2022, so this factor always led to delays in the company’s renewable energy projects, along with unexpected costs putting pressure as well. This all led to the pressure on the company’s dividend, leading to a slice by half.
By reducing the dividend, Algonquin stock was able to preserve some cash flow, allocating that cash towards essential expenses and debt repayments. It also allowed the stock to maintain an investment-grade credit raining, which is important for Algonquin stock to continue borrowing money at lower interest rates.
A long process
While the process was a long one, Algonquin stock is now back to making a profit. During its fourth quarter, the company managed to produce net earnings that were up year over year. The company also produced better results for 2023. Annual adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew 4%, though net earnings were down 11%.
The stock faced challenges, but progress was made. Algonquin stock terminated its Kentucky Power deal and planned a renewable sale. However, it was able to commission significant new wind and solar generation and increase revenue from its new rate approvals.
Altogether, profit increased to US$186.3 million, up from a loss the year before. Earnings per share hit US$0.27 as well, again compared to a loss. Revenue, however, was down 11% in the quarter to US$666.9 million from regulated services and renewable energy groups. This may signal a strategic shift, allowing investors to gain interest once more.
Shares rise
While it wasn’t a surge in share price, Algonquin stock was up 5% before falling back slightly. What likely caused the increase was the profitability shift, with investors now seeing momentum toward profitability increase. The focus on the core business, with the sale of its renewable energy business, was likely seen as a positive step to simplify its focus and improve efficiency.
What’s more, analysts seemed to expect far more losses, so the profit and focus were certainly a welcome surprise. Even so, there are a few things to consider before jumping in on Algonquin stock once more.
The strategic shift simplifies the business but also removes a potential area for growth. What’s more, profit was up, but revenue was down. So, the company will need to find new ways of achieving more revenue to continue growing profit.
And while its dividend is high at 7.28% as of writing, many might be wary about past dividend cuts. Finally, the company is iffy about 2024. Algonquin stock will focus on operational efficiency, and that transition could involve uncertainty and even impact the share price.
So, is Algonquin stock a buy after this? That remains to be seen. I would wait until more profitability as well as its strategic plan bear fruit.
