The market is full of great, long-term picks that don’t always reflect their potential in the current stock price. One such stock that has investors questioning whether to buy, sell, or hold right now is Algonquin Power & Utilities (TSX:AQN).
Here’s a look at the stock, taking a lens on answering whether investors should buy, sell, or hold Algonquin now.
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The case to buy
For those unfamiliar with the stock, Algonquin is a utility stock. The company offers regulated utility services, which include water, electric and gas services. The sheer necessity of those services makes Algonquin a viable inclusion in any portfolio from a predictable revenue generation aspect.
More importantly, that predictability makes Algonquin a solid defensive option.
That reliable revenue stream also allows Algonquin to pay out a handsome quarterly dividend. As of the time of writing, that dividend works out to a yield of 4.6%.
If that were the entire case to consider, Algonquin, the buy, sell, or hold question would be easy to answer.
Unfortunately, Algonquin is coming off a long run of disappointing results, high debt, and a recent cut to its dividend.
Much of that can be traced back to Algonquin’s attempts at establishing a high-growth portfolio of renewable energy facilities. The company finally sold off those facilities and turned its focus to regulated utilities earlier this year.
What prospective investors looking to buy Algonquin should focus on are three key areas. First, the future potential of the stock (which is huge). Next, the quarterly dividend (which is lower, but more sustainable). And finally, the reliable revenue generator that Algonquin has become.
The case to sell
Existing investors, particularly those who are seeking higher returns, may find that now is a good time for an option sell. This is especially prudent given the stock’s recent rise this year.
Specifically, as of the time of writing, Algonquin boasts a 24% gain year-to-date. This pales in comparison to the one-year and five-year losses, which work out to -6% and -54%, respectively.
Adding to those woes is the fact that despite those efforts to turn the business around, Algonquin still has considerable debt and a still-high payout ratio on its dividend.
To put it another way, despite recent gains, this is still a very volatile stock that has a ways to go in its recovery.
Existing investors who lack that appetite for risk may be compelled to exit their position now that the stock is trading up this year.
The case to hold
There is one final option for existing investors, and that is to hold.
While Algonquin remains fairly volatile, the company has seen improvements in its business. And more importantly, those improvements aren’t entirely reflected in its still deflated stock price.
Specifically, there’s the sale of its renewable business. That was a significant turning point for Algonquin, which shifted the company from a growth focus to a regulated utility model.
Regulated utilities generate a reliable revenue stream that often leaves room for growth while also paying out a handsome dividend.
And while Algonquin isn’t fully there yet, it has made significant progress. In fact, during the most recent quarterly update, Algonquin reported net earnings of $95.4 million. This was a noted improvement over the $56.8 million loss reported in the same period last year.
That fact alone shows why existing investors contemplating to buy, sell, or hold this utility stock may want to hold their existing position.
Decision time: Will you buy, sell, or hold Algonquin?
Algonquin is one of the stocks that can provide a juicy income and growth potential, but it’s not without some risk.
In my opinion, a small position in Algonquin is warranted for those looking to add a utility stock that can generate income. For existing investors with higher entry points, this is an ideal time to pick up more, potentially lowering your average cost.
And for those existing investors seeking an exit, Algonquin’s healthy year-to-date gains may serve as an appropriate off-ramp.
Finally, let’s acknowledge those existing investors with longer timelines. If there’s also an ability to a tolerate some risk, those investors could see a big upside from owning Algonquin stock.
Buy, sell, or hold – Algonquin has something for each investor.
