Shares of Algonquin Power & Utilities (TSX: AQN) have more than doubled since its IPO (initial public offering) in 2009. However, after adjusting for dividend repayments, cumulative returns are much higher at 370%, compared to the TSX index gains of 205%. Today, AQN stock trades 64% below all-time highs, raising its dividend yield to a tasty 7.3%.
The TSX dividend stock has grossly underperformed the broader markets since early 2021. In the last two years, interest rate hikes have driven valuations of debt-heavy companies such as AQN lower. Further, Algonquin was forced to lower its dividend by 40% last year, as its payout was unsustainable amid the rising cost of debt and a challenging macro environment. The company also announced plans to sell its renewable energy business to lower debt and strengthen the balance sheet.
How did AQN perform in Q1 of 2024?
In the first quarter (Q1) of 2024, AQN reported revenue of US$737 million, down 5% year over year. While its regulated utilities business revenue was down 7%, clean energy sales grew by 11%. Moreover, its adjusted funds from operations fell by 9% to US$189.2 million, while long-term debt rose to US$9.09 billion from US$7.85 billion in the last 12 months.
Algonquin Power ended Q1 with a negative free cash flow of US$0.12 per share, which suggests its dividend payout remains under risk and can be suspended completely if its cash flow remains negative.
Algonquin’s rising debt balance and falling profit margins make it a high-risk bet in June 2024. Here is a dividend giant I’d buy instead.
The bull case for TD Bank stock
Valued at $132 billion by market cap, Toronto-Dominion Bank (TSX: TD) offers you a forward yield of 5.4%, given its annual payout of $4.08 per share. In the last 20 years, TD Bank has returned over 600% to shareholders after adjusting for dividends. However, interest rate hikes have meant the TSX bank stock is down 30% from record levels, allowing you to buy the dip and benefit from outsized gains when market sentiment improves.
Despite tepid lending demand, TD reported adjusted earnings of $3.8 billion or $2.04 per share in fiscal Q2 (ended in April), compared to $3.7 billion or $1.91 per share in the year-ago period.
TD Bank’s Canadian personal and commercial banking was a key driver of growth as revenue rose by 10% to $4.84 billion, and net income ticked higher by 7% to $1.74 billion. TD’s earnings growth was partially offset by higher provisions for credit losses and non-interest expenses.
Business segments such as wealth management & insurance and wholesale banking also performed well in Q2. TD’s wealth management and insurance net income surged 19% to $621 million, while revenue growth stood at 11% due to higher fee-based and transaction sales.
TD’s wholesale banking sales rose by 37% to $523 million, and net income more than doubled to $441 million in Q2 due to higher trading revenue, underwriting fees, and lending sales. Priced at 9.5 times forward earnings, TD Bank stock is cheap and trades at a discount of 13.3% to consensus price target estimates.
