Why Algonquin Power & Utilities Stock Slid 49.3% Last Year

Here’s why shares of AQN fell hard last year.

| More on:
An engineer works at a hydroelectric power station, which creates renewable energy.

Source: Getty Images

The Canadian utilities sector is usually considered a defensive, lower volatility pick, but there can still be substantial variation within it. Last year, a surprise underperformer – to the shock of many investors – was Algonquin Power & Utilities (TSX:AQN).

Long-loved for its dividend and earnings growth, AQN crashed sharply from $15.29 per share on November 10th, 2022 to a 52-week low of $8.70 by late December. The negative catalyst? A poor third-quarter earnings report outlining a substantial miss on the bottom line. Let’s see what happened.

2022 headwinds

Arun Banskota, President and Chief Executive Officer of AQN, blamed “increasing interest rates and the timing of tax incentives related to certain renewable energy projects” as the culprit behind AQN’s earnings coming in under expectations.

The source of ire for investors was AQN’s reported adjusted net earnings of $73.5 million, which marked a significant 25% year-over-year decrease compared to Q3 2021. Adjusted earnings per share, or EPS, came in at $0.11, a 27% decrease year over year.

These dismal results were primarily caused by higher interest expenses of $23.3 million. This risk factor is one that is present for the broad utilities sector, and not just AQN. Utilities are particularly sensitive to interest rate changes as they often borrow heavily to support growth. Utility companies can face significant headwinds when rates go up, as they did in 2022.

Alternatives to AQN

With its current share price at the time of writing of $9.20, AQN’s forward annual dividend rate of $0.98 represents an 11.15% dividend yield. This is high enough to be enticing, but investors should be aware of “yield traps” before they flock to lock in a low yield on cost.

In my opinion, AQN’s prospects depend on how the macroeconomic environment plays out. If inflation continues to remain sticky, both the Federal Reserve and Bank of Canada are likely to press on with their existing pace of interest rate hikes. This will create further headwinds for AQN.

Investors looking for a more defensive, income-oriented utility sector play for a volatile, sideways trading market can consider covered call exchange-traded funds instead. These ETFs provide high monthly income, which tends to increase during periods of greater market volatility.

A great pick here is the BMO Covered Call Utilities ETF (TSX:ZWU). This ETF holds a portfolio of 75 Canadian and U.S. utilities, pipeline, and gas stocks. Thanks to the covered call overlay, ZWU is currently paying an annualized distribution yield of 8.27% monthly.

A great way to invest for income is using ZWU as the core of your portfolio and supplementing it with a few stock picks (and the Fool has some great alternatives to AQN to put on your watchlist).

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Energy Stocks

Pumpjack in Alberta Canada
Energy Stocks

Is Cenovus Energy Stock a Good Buy?

Cenovus Energy (TSX:CVE) stock is primed for capital gains and strong total returns in 2025, driven by strategic buybacks and…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

2 High-Yield Dividend Stocks That are Screaming Buys Right Now

Natural gas stocks like Peyto Exploration and Development are yielding above 7% today and look undervalued as natural gas strengthens.

Read more »

chart reflected in eyeglass lenses
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Cenovus?

Want to invest in Canadian energy? Canadian Natural Resources and Cenovus Energy are two of the largest, but which one…

Read more »

oil pump jack under night sky
Energy Stocks

Where Will Cenovus Stock Be in 1/3/5 Years? 

Let's dive into whether Cenovus (TSX:CVE) stock is worth buying right now and where this stock could be headed over…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Best Stock to Buy Right Now: Canadian Natural Resources vs Suncor?

These energy giants are returning significant cash to shareholders.

Read more »

how to save money
Energy Stocks

This 7.8% Dividend Stock Pays Cash Every Month

This monthly dividend stock is an ideal option, with a strong base, growing operations, and a strong future outlook.

Read more »

data analyze research
Energy Stocks

The Smartest Dividend Stocks to Buy With $2,000 Right Now

Dividend stocks like Canadian Natural Resources (TSX:CNQ) can amplify your wealth.

Read more »

oil pump jack under night sky
Energy Stocks

3 Must-Buy Energy Stocks for Canadians Before the Year Ends

There are a lot of energy stocks out there to consider, but these three have to be the best options…

Read more »