Struggling to keep its own power on

Algonquin Corp., a growth-focused company through organic initiatives, strategic acquisitions and development of world-class renewables, has failed to meet market expectations with its reported earnings per share.

Algonquin Power & Utilities Corp (TSX—AQN; NYSE—AQN)

Marc Johnson has downgraded Algonquin to a Hold, citing a long-term share price recovery and high dividends as the primary reasons.

President and Chief Executive Officer, Arun Banskota comments on these results. He says, “it was a challenging third quarter. Despite year-over-year growth in adjusted underlying earnings, our results for the quarter came in below our expectations and were negatively impacted by increasing interest rates and the timing of tax incentives related to certain renewable energy projects…We are not immune to the macroeconomic environment. Our team is focused on identifying and implementing the necessary adjustments…Although our earnings were challenged, this past quarter AQN took important strides executing on our growth objectives across both the regulated and renewable sides of our business. On the regulated side, we are one step closer to completing the pending Kentucky Power acquisition, which is expected to add to our rate base and grow customer connections. The signing of our inaugural asset-recycling transaction demonstrates the potential value of our existing renewable energy portfolio and greenfield pipeline. We continue to be excited about the prospects of our asset recycling program for 2023 and beyond.”

Algonquin’s adjusted net earnings were also negatively impacted year-over-year by higher interest expense as a result of borrowings to support growth and higher interest rates. The company also had lower year-over-year recognition of investment tax credits and production tax credits which included revised estimates associated with renewable projects that are now expected to be placed in service in 2023.

In 2022, Algonquin’s earnings are expected to dip but can anticipate an uphill outlook in 2023.

Analyst Brent Stadler of Desjardins Capital Markets has reduced his recommendation about Algonquin to a Hold. He told The Globe and Mail that, “an uncertain growth outlook, concerns around upcoming financial results, an elevated [dividend] payout ratio, and questions on dividend growth and strategy prevent us from being able to recommend the stock at this time.”

Just keep in mind that Algonquin’s stock is now much less costly. That’s because its shares fell by a significant percent after it released its third-quarter results on November 11. Following the news, just three days later, it dropped even more. This improves the risk-reward ratio.

For now, Hold Algonquin for long-term share price gains and high dividends. The high yield means that the company could trim its dividend.

This is an edited version of an article that was originally published for subscribers in the December 2022/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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