Algonquin Power & Utilities (TSX:AQN) experienced a turbulent ride on the TSX over the last few years. The stock has seen significant swings, with a 52-week high of $9.90 and a low of $6.75, reflecting the challenges the company has faced. Over the past year, AQN’s stock price has dropped by over 27% as of writing, although it offers an attractive dividend yield of 5.05%. This continues to appeal to income-focused investors. Despite these fluctuations, Algonquin remains a key player in the North American utility market, with a large institutional ownership of 61.43%. So, with investors flipping back and forth, is the stock a buy, sell, or hold?
Fundamentals
For those considering AQN a buy, the stock’s forward price-to-earnings (P/E) ratio of 14.16 shows potential for future growth, thereby suggesting that the market may be underestimating its recovery. Trading at a price-to-book (P/B) ratio of just 0.67, AQN therefore appears undervalued. Thus making it an attractive option for value investors looking to capitalize on its low price. Additionally, Algonquin’s stable presence in the utility sector offers long-term growth potential.
However, some investors might consider selling due to AQN’s financial struggles. The company has a high payout ratio of 273.55%, raising concerns about the sustainability of its dividends. Furthermore, AQN’s debt load is substantial, with total debt of $8.35 billion and a debt-to-equity ratio of 108.48%. The company’s revenue growth has also faced a decline, with quarterly revenue down 4.7% year over year, which could indicate operational challenges that may further dampen investor confidence.
How about the dividend?
Despite the concerns, many investors choose to hold onto AQN stock because of its consistent dividend payouts. While the high payout ratio is a concern, the company’s dividend history is a testament to its commitment to returning value to shareholders. With a beta of 0.52, the stock also experiences less volatility than the broader market, thereby making it a relatively safe option for investors looking for stability in uncertain economic times. The utility sector, especially companies with renewable energy assets like AQN, can offer a defensive play in a diversified portfolio.
Additionally, Algonquin’s future looks promising due to its diversified business model, which includes regulated utilities, though no longer renewable power generation after a recent sale. This strategy could lead to long-term stability and growth, allowing AQN to overcome its current challenges and reward patient investors.
Foolish takeaway
Altogether, whether AQN is a buy, sell, or hold depends on your investment strategy. The stock presents opportunities for growth due to its low valuation, but financial risks such as high debt and payout ratios must be considered. For long-term investors who value dividend stability and are willing to weather the ups and downs, AQN could be a valuable addition to their portfolios. However, for those concerned about short-term financial performance, it might be time to reassess their position.
As always, careful consideration of your financial goals and risk tolerance is key when making any investment decision. Algonquin Power & Utilities remains a dynamic stock, and how you perceive its future will guide whether you buy, sell, or hold.
