Valued at a market cap of $5.6 billion, Algonquin Power & Utilities (TSX: AQN) owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets. Its Regulated Services business operates a portfolio of rate-regulated utilities in the U.S., Canada, Chile, and Bermuda. The business provides electric, natural gas, and water distribution services to more than one million connections. Moreover, Algonquin Power also has a renewable energy segment that owns and operates hydroelectric, wind, solar, and thermal facilities.
Algonquin Power stock trades 68% below all-time highs and has trailed the broader markets significantly since the start of 2022. In this period, it has reduced its dividend payout twice due to falling cash flow and rising interest payments. It recently disclosed plans to sell its clean energy business to reduce long-term debt and strengthen the balance sheet.
Today, AQN stock offers shareholders an annual dividend of $0.36 per share, translating to a forward yield of 4.9%. Let’s see if you should invest in this TSX dividend stock right now.
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Algonquin Power offloads its clean energy business
According to a report from Bloomberg, Algonquin Power is selling its renewable energy business for US$2.5 billion due to pressure from Starboard Value, an activist investor. The business will be sold to a subsidiary of LS Power and should lower AQN’s debt balance while improving its fundamentals.
In recent years, utilities such as American Electric Power and Duke Energy have also offloaded their clean energy assets as investors have forced companies to focus on their core utility businesses, which generate stable cash flow and dividends across business cycles.
Earlier, Starboard Value raised questions regarding Algonquin’s poor balance sheet management, as the company’s interest payments have risen from US$181 million in 2019 to US$390 million in the last four quarters. The rising cost of debt meant AQN reduced its dividend again last month after lowering the payout in early 2023.
According to Algonquin, the sale of its renewable energy business will make it a pure-play, regulated utility, allowing it to focus on a singular business model. Algonquin will receive US$2.3 billion in cash and around US$220 million via an earn-out agreement tied to certain wind assets. Notably, the deal includes the sale of AQN’s operating wind and solar assets, in addition to battery storage and renewable gas projects in various development stages.
Is AQN stock a good buy right now?
While Algonquin’s asset sales will boost its liquidity position, the company ended the second quarter with more than US$8 billion in long-term debt. Once the asset sale is complete, the company will have to showcase its ability to generate enough cash flow to service its debt and dividend payouts.
Even after slashing its dividend, Algonquin Power’s payout ratio is expected to remain between 60% and 70% of its core regulated earnings power, which is quite high. However, given consensus price target estimates, AQN stock trades at a 15% discount right now.
I would avoid investing in this dividend stock for another 12 months to see if Algonquin can continue to deliver on its financial goals.
