Algonquin Power & Utilities’ decision to sell its non-regulated renewable assets and focus entirely on its regulated utilities business is a game-changer.
This move significantly reduces risk and enhances earnings predictability because regulated utilities typically offer more stable cash flows and returns. While the company recently reduced its quarterly dividend by 40.1%, the new annual yield remains highly competitive and particularly appealing given its lowered risk profile.
Meanwhile, the stock trades at just 16.3 times the company’s forward earnings forecast.
ALGONQUIN POWER & UTILITIES (Toronto symbol AQN; www.algonquinpower.com) has agreed to sell most of its non-regulated renewable power assets, which produce electricity from about 40 clean-energy plants in North America, to LS Power.
Algonquin will receive $2.28 billion when it completes the transaction in late 2024 or early 2025 (all amounts in U.S. dollars). It could receive an additional $220 million depending on the future performance of those assets.
The company has also agreed to tender its 42.2% stake in Atlantica Sustainable Infrastructure plc (Nasdaq symbol AY) to an investor group that is buying that firm. It will receive $1.08 billion.
Algonquin plans to apply the cash from those sales to its long-term debt of $8.29 billion (as of June 30, 2024). That’s a high 2.3 times its $5.1 billion (Canadian) market cap.
The sales will let Algonquin focus solely on its regulated utilities, which supply electricity, gas, water distribution and wastewater collection services to 3.15 million customers in Canada, the U.S., Chile and Bermuda.
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Partly due to the loss of cash flow from its renewable operations, Algonquin has cut your quarterly dividend by 40.1%. Starting in October 2024, investors began receiving $0.065 U.S. a share instead of $0.1085 U.S. The new annual rate of $0.26 U.S. still yields a solid 5.4%.
As a result of its recent dividend cut, Algonquin’s dividend has now declined an average 14.3% annually over the last 5 years. Its TSI Dividend Sustainability Rating is Average.
Dividend Stocks: Activist investor’s influence led to strategic shift, now earnings rise at Algonquin
Meanwhile, in the three months ended June 30, 2024, Algonquin’s revenue fell 4.7%, to $598.6 million from $627.9 million a year earlier. That’s mainly because it passed along lower natural gas prices to its customers. If you factor out unusual items, earnings improved 16.0%, to $65.2 million from $56.2 million. Due to more shares outstanding, per-share earnings rose at a slower rate of 12.5%, to $0.09 from $0.08.
Going forward, shifting to a pure-play regulated utility firm will cut Algonquin’s risk while satisfying activist investor Starboard Value, which owns 7.5% of the stock. Moreover, its dividend payout ratio will be a more sustainable 60% to 70% of its long-term earnings.
The shares trade at a moderate 16.3 times forecast earnings, a reasonable multiple in light of the high yield and the company’s newly focused outlook.
Recommendation in Dividend Advisor: Algonquin Power & Utilities Corp. is a buy.
Comments
Chris
I would be careful jumping back into this former market darling. Just but a few years ago the narrative was all about expansion and renewable energy. I would wait until they actually sell off their renewables and see how they rebalance themselves as a conventional utility. I say this as a guy that got burnt on the old Atlantic Power Corp, who over extended themselves, and struggled for years until they were taken out by private equity. In Algonquin’s case the renewable assets remain a tad murky on the balance sheet due to initial subsidies which may have gone to support dividends rather than debt.6-12 months from now they may be a “safe utility” but who knows how their management may chose to try the market darling strategy again.
You recommend Algonquin Power as a buy. Do you foresee a turnaround for the stock? The dividend is attractive but the stock has been on a fairly steady decline for some time, with a significant downward move since May 2024. Losing significant value doesn’t seem to make the dividend worth it.
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X No, I don’t want to make steady income from dividends.
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I would be careful jumping back into this former market darling. Just but a few years ago the narrative was all about expansion and renewable energy. I would wait until they actually sell off their renewables and see how they rebalance themselves as a conventional utility. I say this as a guy that got burnt on the old Atlantic Power Corp, who over extended themselves, and struggled for years until they were taken out by private equity. In Algonquin’s case the renewable assets remain a tad murky on the balance sheet due to initial subsidies which may have gone to support dividends rather than debt.6-12 months from now they may be a “safe utility” but who knows how their management may chose to try the market darling strategy again.
Thanks for your comments.
I am very cautious about buying this stock again.
I will wait awhile.
Thanks for your feedback.
You recommend Algonquin Power as a buy. Do you foresee a turnaround for the stock? The dividend is attractive but the stock has been on a fairly steady decline for some time, with a significant downward move since May 2024. Losing significant value doesn’t seem to make the dividend worth it.
Thanks for your question. We updated our advice on Algonquin in the latest issue of our Dividend Advisor newsletter.