Algonquin Power & Utilities (TSX:AQN) has long been a popular choice for dividend-seeking investors. Yet the stock has been going through some turmoil lately. Now with a current yield of 5%, this figure might seem enticing. Yet before diving in, it’s essential to assess whether this dividend yield is sustainable and if Algonquin stock is worth a buy. Let’s take a closer look at the company’s recent earnings, dividend history, management, and overall outlook to help make an informed decision.
Source: Getty Images
Recent performance
Starting with recent earnings, Algonquin stock reported revenues of $2.6 billion over the trailing 12 months (TTM). Despite this solid revenue base, the company’s quarterly revenue growth year-over-year was negative, declining by 4.7%. Its net income was $114.1 million, translating to a diluted earnings per share (EPS) of 0.22. One red flag here is that their operating margin stands at 13.7%, which shows they still generate some healthy profits. Yet this isn’t as robust as that of some other utilities. This could be a factor to consider, especially when thinking long term.
As for Algonquin stock’s dividend history, AQN has been consistent in paying out dividends, with a trailing annual dividend yield of 6.1%. The forward annual dividend is now sitting at a 5% yield, which is still competitive. However, the payout ratio at a whopping 273.6% raises some concerns. This indicates that the company is paying more in dividends than it earns. And this could mean the current yield isn’t sustainable unless Algonquin finds ways to boost profitability or decrease debt.
Challenges
Algonquin has faced some challenges in the last while. A significant concern has been its high debt levels, currently standing at $8.4 billion. The company’s debt-to-equity ratio of 108.5% suggests that it’s relying heavily on borrowed money to finance operations. This can be risky, particularly in a rising interest rate environment. It’s something management will need to address moving forward. Fortunately, the company’s total cash reserves are at a healthy $131.6 million, offering some cushion for now.
Management effectiveness is another area worth analyzing. Algonquin’s return on equity (ROE) of 0.24% is underwhelming, especially for a utility company as investors often expect steady returns. This low ROE suggests that management isn’t generating strong profits relative to shareholder equity. And this could signal inefficiencies or challenges in maximizing shareholder value.
Looking ahead
Looking at the company’s future outlook, analysts suggest that Algonquin stock will continue to face headwinds, especially as it navigates its high debt load. However, some see potential upside if the company can execute on its renewable energy projects, a key focus for its growth strategy. The stock’s forward price-to-earnings (P/E) ratio of 15.4 is reasonable, indicating that while there’s no extreme growth expected, the stock could still offer steady returns if managed well.
On the technical side, Algonquin’s stock has been under pressure, with a 52-week range between $6.75 and $9.28. As of writing, it’s currently trading near the lower end at $7.18. This suggests that the stock has been beaten down in recent months, which could present a buying opportunity for investors looking for value. However, it’s crucial to factor in the broader market conditions and how rising interest rates might affect utility stocks like Algonquin, which tend to carry heavy debt loads.
Bottom line
So while Algonquin stock offers an attractive dividend yield of 5%, its high payout ratio, significant debt, and declining revenue growth may pose challenges. Investors looking for a steady income stream should weigh these risks carefully. The company’s future success will depend on how well management can navigate its debt and capitalize on its renewable energy ventures. Algonquin stock could be worth considering for dividend investors, but caution is warranted.
