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.
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.
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.