It’s been a wild ride for investors of Alongquin Power & Utilities (TSX:AQN) over the last few years. And honestly, not in a good way. Shares of Algonquin stock have shrunk lower and lower over the last five years, and remain down in 2024.
But there is one income stream of interest that keeps investors around, and that’s the company’s dividend. After slashing it to help strengthen its bottom line, Algonquin stock now offers a 6.93% dividend yield as of writing. But, is that enough?
What happened
First off, let’s discuss why Algonquin stock cut its dividend in the first place. The utility stock did this back in January 2023, for a few reasons that would help its overall financial health. Rising interest rates was one of them, since the company is holding a significant amount of debt with variable interest rates. And as rates rose, so too did their interest expenses.
The company also saw lower cash flow throughout 2022. This limited its ability to fund further projects, while maintaining the previous dividend level. Furthermore, Algonquin also went through unexpected costs and delays in completing its renewable energy projects. This all added to its financial pressure, causing the company to slash its dividend and plan US$1 billion in asset sales.
Did it work?
That’s the big question, and it’s still a bit too soon to tell whether Algonquin has improved enough for investors. The company’s debt load has come down however, and this led to the stock raising its dividend again in the latter half of 2023.
As for the strengthening of its balance sheet, the company still has more room to improve. For the full-year of 2023, debt rose by 13% from US$7.5 billion to US$8.5 billion in 2023. Revenue also dropped by 2% year over year, with cash from operations falling by 6% during the fourth quarter, though rising 1% year over year.
This goes to show that the company still has a lot more work to improve its balance sheet. And until that happens, it’s unlikely that there is going to be more growth for Algonquin stock in the near future.
Is the dividend worth it?
Algonquin continues to look like a volatile company to invest in at these levels. Even with shares down so far in 2024. The company has seen its shares drop 28% in the last year alone. Yet it still remains quite pricey, trading at 205.3 times earnings as of writing!
While there continues to be some improvements in terms of its earnings per share (EPS) growth quarter over quarter, overall the company is still swimming in debt. Frankly, it was probably too early for the company to increase its dividend after the cut, and it should have used that money to improve its balance sheet instead of trying to attract back investors for the yield.
For now then, I would consider Algonquin stock not the best investment, though it remains one to watch. After cutting costs and improving its bottom line, top-line growth will assuredly come. And when that happens, today’s share price could look pretty valuable.
