Forget Algonquin Stock: Buy This Magnificent Utilities Stock Instead

Not all utility stocks are as safe and stable as they might seem. This is why it might be time to look elsewhere when it comes to this stock.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 16, 2024 10:00 am EDT

Algonquin Power & Utilities (TSX: AQN) has raised some red flags recently, both with its declining stock performance and dividend cut, which could be a concern for income-focused investors. While it has been a popular choice in the past, the instability in its earnings and financials suggests that other utility stocks with more stability might be better long-term options. Today, let’s look at some options.

The sun sets behind a power source — Source: Getty Images

What happened?

Algonquin has been showing signs of negative momentum on the TSX. This may raise concerns for investors. Over the past few quarters, the company has struggled to maintain steady growth, reporting a decrease of 20% in adjusted net earnings for the first quarter (Q1) of 2024. Additionally, while net utility sales saw a modest 6% increase, the drop in earnings per share (EPS) by 18% compared to the previous year signals financial strain.

Q2 2024 also highlighted some of these challenges. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 12%, and adjusted net earnings rose by 16%. Yet the company announced its intention to sell its renewable energy business for up to $2.5 billion. This sale is part of a broader strategic shift to focus solely on regulated utilities. And this may unsettle some investors who were drawn to AQN’s diversified portfolio.

The divestment of its renewable energy assets, coupled with a cut in capital expenditures and dividends, indicates that AQN is aiming to stabilize its financials. However, this transition raises questions about its future growth prospects, and other utility stocks with more stable earnings might be safer options for investors looking for long-term, reliable returns.

Another option

Hydro One (TSX: H) has been gaining positive momentum on the TSX, showing strength through consistent financial performance and strategic initiatives. In the most recent second quarter of 2024, Hydro One reported a year-over-year increase in basic earnings per share (EPS) to $0.49, up from $0.44 in the same period in 2023.

This growth was driven by higher revenues resulting from Ontario Energy Board (OEB)-approved transmission and distribution rates. Along with an uptick in average monthly peak demand. These solid financials demonstrate Hydro One’s ability to adapt to changing market conditions while continuing to enhance its operational efficiency.

The company’s capital investment strategy is also a key driver of its success, with $818 million invested in Q2 2024. Significantly up from $649 million the previous year. This includes the filing of a leave to construct the St. Clair Transmission Line, an important project supporting economic growth in Ontario. Hydro One’s commitment to strengthening its infrastructure, coupled with strategic partnerships like those with First Nations, positions the company well for long-term growth.

Plus, Hydro One continues to demonstrate strong corporate responsibility. In fact, it was named one of Canada’s Best Employers for the ninth consecutive year and recognized on the 2024 Best 50 Corporate Citizens list. With ongoing sustainability initiatives and a steady dividend yield, Hydro One presents itself as a reliable investment option, especially for those seeking long-term value in the utilities sector.