Even if you canât accurately predict the performance of a stock in the near future (assuming all macro conditions remain unchanged), simply identifying whether to be optimistic or cautious about a stock can help you make an informed decision. Letâs see which direction Algonquin Power (TSX: AQN) might take in the next three years.
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The present
Algonquin is still reeling from a massive bear market that has continued for about two years. It is still trading at a 54% decline from its 2022 prices. Two main factors that triggered this slump were the financial troubles and the dividend cuts it necessitated. The company slashed its payouts by 40% and sold about a billion dollars’ worth of assets to remain financially viable.
The move alienated a lot of investors and triggered a significant selloff frenzy. At its worst, the company lost over 60% of its valuation.
Poor debt management was one of the important factors behind its weak financials, and while the company’s operating income has remained in the green over this ordeal, the debt is still a major concern. It’s currently almost twice the company’s market capitalization. The price-to-earnings ratio is dangerously high as well at 213%.
The future
The company seemed to be moving in a good direction following the disastrous two years. A significant positive development is the dividends, which the company raised quite generously in the second half of 2023. Another similar hike would mean that the dividends would reach or may even exceed the levels at which they were cut.
The year-end financials were weak but not dangerous. While revenues slumped, adjusted earnings before interest, taxes, depreciation, amortization and operating profit from the regulated utility segment actually increased.
Another positive thing to look out for is all the new projects that might be coming online in the next few years. The company will add about 466 megawatts of electrical output from its solar and wind projects in the next couple of years.
The company has taken on more debt to pay down its short-term debt, which may not seem like the wisest course of action, but it was a practical decision. If its financials remain healthy or improve, as the company is expecting to renegotiate some of its regulated rates, the debt management going forward would be better than it has been in the past.
Foolish takeaway
As a renewable-oriented power generation and utility company, Algonquin is also a great pick from an ESG (environmental, social, and governance) investing perspective.
As for where the company would be in the next three years, I believe there is reason to be optimistic and, at the very least, the company would most likely be in a better position than it is today, with dividends higher than the levels they were slashed at and valuations reaching or exceeding the level they fell from in 2022.
