Algonquin Power & Utilities Corp has gone through quite a bump in the road since the last earnings.
The predictions around the dividend safety covers the full spectrum. Some investors are optimistic, and others are pessimistic and expect a cut very soon.
Earnings Comments To Pay Attention
Before we go on, here are comments from the earnings.
“Looking ahead into 2023, broadly speaking, we expect pressure from increasing interest rates and broader economic conditions to impact our earnings,” Myers said. “In light of the changing environment, we are reviewing our plans and targets for 2023 and beyond.”
– Yahoo Finance
Algonquin hopes to close a US$2.6 billion deal to acquire the Kentucky Power Company and AEP Kentucky Transmission Company in January. At the same time, it entered into an agreement last month to sell its stake in a portfolio of wind assets in Canada and the U.S. to a U.K. investment firm.
– Yahoo Finance
Algonquin says it will host an investor and analyst day in early 2023.
– Yahoo Finance
Running A Business
The first thing management has to do is run a solid business. The profitability of the company in the long term is critical. Let’s be clear here that I am specifically calling out the long term and not the short term per say.
Take a few minutes to listen to the CEO speaking about the acquisition when it was first announced. That’s what you are investing in as an investor, the yield is a consequence of supporting the CEO’s, and the management team’s, decision.
To cover the increasing interest rates on their loan, many investors expect to see a dividend cut or share dilution. Share dilution means that the company will raise capital by issuing shares.
What AQN is doing is selling some assets from what you can see but it also has the potential to dilute shares before it drops the dividends.
On the flip side, cutting the dividend is not an easy decision. The management is aware of the impact of a dividend cut as it means being dropped of certain indexes. It’s a big deal to be included in indexes as it increases trading of their shares.
It’s not an easy decision for management as you can see.
AQN Sentiment
From what I am seeing, a lot of DIY investors choose to hold and DRIP the dividend. If you were investing for income, then it’s one way to play it.
I really don’t like it when someone says “it’s not a loss if I don’t sell” … What does that really mean? The value is gone. What else is there? The only question is what’s the fastest path to growth again? Is it Algonquin Power & Utilities Corp, or Intact Financial, or National Bank, or Canadian National Railway?
On the other hand, if you are not needing the income than it’s a tough pill to swallow in my opinion. I expect Algonquin Power & Utilities Corp to be dead money for a few years and the dividend alone, even when you DRIP it, isn’t good return.
It’s not an easy decision to let go of a stock sometimes … but remember that it’s not about how well it did but about how well it’s going to do next. While I don’t like yield on cost as a metric, in this case, your yield on cost would be below the market yield which isn’t a great place to be in.
For others that were on the sideline, than it’s a great opportunity as you can get near 9% return from the yield alone. It’s a pretty good income for waiting for a recovery. Especially if you are at the income stage of your investing journey.
One More Quarter Needed
This quarter did not come as a surprise by some. The stock had been struggling for a year now. Some people saw this interest rate challenge coming and kept downward pressure on the stock.
With the last quarter, it’s confirmed that interest payments are impacting the company’s finances and they need to take action. While they did not indicate a dividend cut, the stock price is showing investors believe one is coming.
Back to running the business… A dividend cut is a reset on consecutive dividend increases. It’s not a simple decision as a utility company. Even maintaining the dividend would have an impact on the stock.
The fact that it has not decided on a dividend cut yet, and that management is fully aware of the upcoming interest rates payment means that they are working on alternatives until other challenges are resolved such as the closing of their acquisition.
The investor day is going to be another big stock price movement I would say. Why is it so chaotic? It’s simple. There are too many variables to get right to predict the outcome as an outsider to the company. I expect that management will look at calming investors during that day by outlining their plan of execution and and showing analysts the path.
Tax Optimization Time
If you have AQN in your taxable account, it could be that you use this opportunity to optimize your taxes. The strategy is called “tax-loss harversting” and it basically allows you to offset capital gains taxes.
When you follow the rules, you can buy the stocks again in 30 days. With the new year around the corner, the timing is perfect.
Thanks for the analysis. There’s a lot of competing noise out there right now and I’m torn on whether to add more shares or just sit with what I have. I imagine AQN will bounce back in the long term. At least I hope so.
Also, sorry to be a jerk, but I have to point out that you’ve been misspelling “utilities” in the company name. Drop that third “t”!
Thanks for your comment and pointing out the spelling. Always appreciated. I have updated the database name.
It is indeed filled with noise and opinions. This is why I added a clip from the CEO back in 2021 outlining why they acquired the Kentucky utility company to put in perspective why they are taking on such debt. Early on, some investors disagreed with it while many dividend investors were complacent as long as the dividend comes in …
Fastforward to today … and investors are showing they don’t believe in the plan and the company is having an investor day to help investors understand the plan. This is why I think it’s too early for a decision on a cut …
For now I am keeping the stock, but I won’t be buying more shares. I have 3% of my portfolio tied to this company and I will make my decision when the CEO gives out his plans in 2023. If I am satisfied with their plans, I will keep it…if not, I will have to unfortunately sell it at a loss. One thing is for sure, they need to address their plans regarding their debt.
I can live with a dividend cut if it helps out the company in the long term like it has with this company. Remember that they did cut it during the ’08-09 crash and the stock rebounded with an approximate 15-16% ann. ROR (with dividend reinvested) ever since….even beating the SPY (SP 500 ETF)….On the other hand, having too much debt can kill any company and that’s the bigger issue for me over just a dividend cut.
Thanks for your comment.
It’s definitelly not a company I had on my radar back then but knowing they dropped the dividend back then should be a consideration by investors that they may do it again.
The question that I find interesting is what is the fastest path to growth again? It’s hard to forget the past and look forward when comparing opportunities. Sure, we can hold AQN for a few years for the dividend assuming no cut. But, wouldn’t it be better to move to another opportunity with a potential for a better total return over the next few years and with less uncertainty? What are those better opportunities? I guess that is the real question.
Thanks Gerry for your comment.
Indeed. That’s the challenge for many investors and it really depends on where they are in their journey. For growth, AQN is a pass for me but for income, there is a potential for some good income while you wait.
That’s the challenge many investors have. I see many chasing high yield and buying REITs for high yield and that’s why the portfolio context is really important.
One thing is for sure, it’s a risky investment.
This is just going to be another SUNCOR for me. Flying High / hot stock for divi investors and then all of sudden super crash and then taken up by Activist investors and turned around so well. AQN needs something like that at this point to tame the management.
Thanks for your comment.
Reading between the lines, you don’t have faith in management if you would want activist investors to get involved. In cases like that, I would not invest if I don’t have fait in management.
Are you holding AQN? Are you still holding it? If so why?
Often it’s the debt rating agencies that can force management to make a choice between a dividend cut or having their debt rated below investment grade and thereby limiting access to an important source of funding on reasonable terms to provide for continuing operations.
Tax loss selling season may keep some additional downward pressure on the stock as the year end approaches.
Some nice assets buried in there somewhere but difficult to value after untangling the debt, regulatory conditions, and all the other moving parts at the moment.
Now if Brookfield or some similar deep-pocketed acquirer shows up then this could become a different story.
I don’t own this stock but agree that it’s more interesting now than it was a month ago although it’s likely going to be a longer term climb back and there are lots of other opportunities out there that may provide less volatility.
Thanks for your comment Richard.
Indeed, the debt rating companies may issue a dire rating causing them to even pay higher interest rates in some cases.
I still have it and have drip and below water of almost 45% and a lot of it in the registered accounts. I am really torn as I see the revenue seems ok and with the Biden environmental carbon legislation in the US AQN should be in a position to benefit. Nobody seem to be mentioning this, WHY?
Thanks for your comment Barney!
It’s not so much what the US administration wants but more about the debt it incured with the acquisition and the payment of the debt. They are exposed to some floating rates which means that every time the interest rates go up, their payment goes up.
The debt payment is real money moving out of the company with interest rates going up 4 times last year in the US with more to come as announced. That’s the part that concerns most investors the most as that money could go to dividends …
I think the reality is that AQN is going to keep moving further and further away from generation, green or otherwise. Their strength now is as a distribution system operator. Their acquisition choices make this clear. It doesn’t matter what green energy initiatives are put forward by any administration. They are telling us this by selling of these assets and continuing their pursuit of the Kentucky system. If green energy was really the answer for AQN then that’s what they would show us they want to do instead they continue to invest in their multitude of distribution systems.
I’d actually prefer they cut the dividend. I don’t like the idea of share dilution. It doesn’t really resolve their cash flow problem. With interest rates continuing to go up, I would be okay with a short term sacrifice to stop some of the bleeding. This USED to be 3% of my portfolio and is now down to 1.74%.
Thanks for the comment Joe.
Indeed, if they could be clear on how they will address the situation, a lot of investors would feel better about it. Now it’s just speculation.
Went from a steady Eddie to a major capital loser, and I sat on our shares during it all. Now down 45 %, and thinking I’ll take the loss for tax purposes, and maybe buy again in Feb. if their report is +
Thanks for the comment Bob.
It’s definitely not an easy decision but as a commenter pointed out, it wasn’t that steady in 2008/2009 as they cut the dividend back then.
It could be the case that we have all had a short memory due the longer than usual bull market.
“I really don’t like it when someone says, ’It’s not a loss if I don’t sell.’ ” Well, it’s not. And the reverse is true as well, it is not a gain if you don’t sell. I don’t own one stock that has not fluctuated in value. That’s the way the market works. As a rule, I don’t sell at a loss, I hold on, enjoy the dividend and sell for a tidy profit when the time is right.
Thanks for your comment Rockinon!
The issue with holding that way and using the expression is that you are potentially leaving money on the table. The mind when it thinks it’s not a loss because I have not sold, is focusing on the wrong aspect. “I don’t want to lose so I don’t sell”. The value is gone at that point in time like you mentioned, that’s how the market works.
In the business and money world, there is a time to take your loss and put the money at work somewhere else. I find that too many dividend investors hide behind the “it’s not a loss until I sell”, so I will earn the dividends while it recovers.
Building a portfolio is about making money and not just blindly saying I earn dividends. I spent a lot of time building a system to clearly understand the performance of my holding and it’s what allows me make better decisions for where to put my money.
Now, I am not saying to sell when you have a loss, I am just saying that I don’t like when someone just says that. At least, give me an argument on why you want to keep on holding to the business. It’s lame to just say “it’s not a loss until I sell”. Often times, in private conversation, I realize that many of the investors just don’t know what to do and are simply lost …
I find it hard to bet against AQN …but I understand your thoughts here, and your hesitations. That roughly $10 per share, and an excellent track record of growth and dividend increases. I don’t think I would bet against AQN in the mid to long-term. Short term, it will be a bumpy ride. I did notice just recently within the last couple of days executives and the board have started to step in buying shares. Some declarations for executives in the board and other managers have been quite large share purchases. This gives me confidence and what they’re going to do in the future. I hold roughly 3% position and in most of my accounts, I am considering adding at about 9.50- 9.90 if it gets down there. Best to all in their investing
AQN
SELL on any chance you get close to break even ( that also includes revenue from this current year’s paid dividends )
NOTE all sells re invested in CU