Where Will Algonquin Utilities Stock Be in 3 Years?

Algonquin Power & Utilities Stock is down big time. Is it a buy?

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Algonquin Power & Utilities (TSX:AQN) stock has given investors a wild ride over the years. Up 128% over the last 14 years, yet down 63% over the last four, it has been a volatile name. Although AQN stock has a 7.3% yield today, it had to fall a lot in price to get to that level. If past trends continue, then the company’s high yield will be overwhelmed by shareholders’ capital losses.

In attempting to gauge where AQN stock will end up, we need to know how the company got where it is in the first place. In this article, I will explore the matter in detail, ultimately concluding that it was because of material financial damage.

Reasons for the recent crash

Algonquin Power and Utilities stock started crashing in November of 2022. It has been mostly in a downward trend since that time. There are several reasons why this has been happening.

The big one is the fact that the company’s earnings declined precipitously in the third quarter of 2022. Worse, they went negative. The release was not taken well by investors. The week those earnings came out, AQN stock slid 17%. From November 4 to the 52-week low set in October 2023, it fell a whopping 53%.

What was it in the release that investors didn’t like? It was mainly the fact that earnings declined. Not only were they negative in that specific quarter, they were negative for the whole 2022 fiscal year. The 2022 loss was fairly large, about 14.5% of the quarter’s revenue. It was big enough that investors started to fear a dividend cut. Early in 2023, the dividend cut arrived, triggering even more selling. Things looked pretty bad for Algonquin.

The question now is, can AQN recover?

Can Algonquin recover?

One somewhat encouraging sign on the “recovery” front is the fact that AQN’s earnings before income and taxes (EBIT) have been growing all these years. Even in 2022, the “disaster year,” it was down only slightly, and by 2023, it was up considerably compared to 2021. However, when you look at the reasons why Algonquin Power’s earnings were negative despite the rising EBIT, you see that they’re not things you can just write off.

Rising interest expenses were a big part of the earnings decline. AQN cannot just eliminate this expense, and it will continue to be high until the Bank of Canada cuts interest rates significantly. Incidentally, the bank did recently cut rates slightly, but probably not enough to save Algonquin Power.

Another big part of the declining earnings was massive investment losses. That’s sometimes a “nonrecurring factor” that can be ignored, but other times it signals poor investing decisions on the part of management. The matter requires deep research by a whole team of investment analysts. I’m inclined to think that Algonquin’s financial problems are fairly serious.

Foolish takeaway

Overall, Algonquin’s recent earnings performance shows many red flags. The company has a lot of debt, the debt is getting more expensive, and management’s investment results aren’t good. I personally would not invest in it. However, that doesn’t mean that a position in AQN will necessarily do poorly. A well-funded team of investment analysts with special software and proprietary data might be able to resolve the matter of whether AQN’s poor investment results are real or an accounting technicality. If so, they would be able to make an informed investment in AQN and potentially collect large dividends. The average investor shouldn’t try it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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