Have you recently considered Algonquin Power (TSX: AQN) for your portfolio ? There are more than a few reasons to consider the company. In the past few years, investors have been split between it being a solid investment or a risky bet.
Let’s look at the case for both and determine if Algonquin is a solid investment or a risky bet.
Source: Getty Images
Algonquin may be a risky bet
Existing investors in Algonquin have already taken a deep haircut on their investment. As of the time of writing, the stock is down a whopping 55% over the trailing 5-year period.
Much of that loss can be attributed to Algonquin’s failed (or perhaps too quick) development of pricey renewable resources. That higher cost, coupled with rapidly rising interest rates, led to the utility’s debt load skyrocketing.
Ultimately, this resulted in Algonquin largely exiting that renewable space. The company also sold off assets and slashed its once impressive (and growing) dividend.
More recently, the stock has been showing double-digit gains year-to-date. Unfortunately, for those longer-term investors, there’s still a way to go for that recovery.
Given the performance of other sectors of the market, it could be a unique time for those investors to look elsewhere for growth.
Algonquin is a solid investment
The flip side of that equation is the opportunity that Algonquin offers for long-term investors who aren’t looking to sell just yet.
For those investors, Algonquin is an undervalued stock with a renewed focus on becoming a pure play utility.
Let’s be clear: utilities aren’t exciting investments. They aren’t filled with long-term massive growth pipelines like flashy renewable energy stocks or tech startups.
But what they do offer is a stable, recurring revenue stream backed by regulated contracts. In turn, that stability allows utilities to invest in growth and pay a handsome dividend.
In the case of Algonquin, that dividend works out to a 4.5% yield. Given the discounted price of the stock, this means that even a $3,000 investment in Algonquin will generate over a dozen shares through reinvestments alone.
Factor in the potential upside in stock growth, and there’s a good reason to buy Algonquin right now.
Final thoughts: Solid investment or a risky bet?
Investors are going to be split as to whether Algonquin is a solid investment or a risky bet.
On the one hand, Algonquin is correcting many of the high-cost risks it made over the past several years. The company is also transitioning more to a pure-play utility model, which will provide stable revenue and (hopefully) a return to a growing dividend.
This could make Algonquin an appealing option for would-be investors.
On the other hand, current investors who have been deep in the red over the past few years may be considering this as a moment to cut losses and move on to something more profitable.
In summary, Algonquin is neither an insane buy nor a stock to run from. At its best, Algonquin is a value play for long-term investors.
Investors who have longer timelines and a risk appetite could see solid gains (and a juicy income) emerge from a position in Algonquin.
