Algonquin Power down almost 50%

Algonquin Power & Utilities was the darling of the investment community for years. At the beginning of this month (November), MarketBeat called AQN a Moderate Buy. Two weeks later, it is a Hold. I wonder what it will be come December: a Sell?

I was slow to the AQN game but after years of watching from the sidelines, I bought into the play just over a year ago. Although I didn't pay the max, by today’s standard I paid too much. I bought on a dip and then that dip turned into a full blown retreat. AQN is now down almost 50% from its high of the past 12 months.

Yesterday AQN hit a new low for the year: $10.19. I added to my holdings. This averaged down my cost per share into the $15 range. At market open today, AQN jumped 2.8%. Although it was unable to hold on to its gains, it dropped to $10.07 in the afternoon, it did not lose more than a few cents. Maybe, just maybe, AQN is now struggling to get off its lows. I am crossing my fingers as some analysts are calling for AQN to fall to $7 or $8 Canadian.

Why has the bottom fell out of Algonquin? In a word, debt. I understand that too much of the AQN debt has a floating interest rate. Thanks to inflation-fighting increasing interest rates, the cost of servicing the AQN debt has been going up rapidly and dramatically.

TD WebBroker carried the following: We underestimated Algonquin's exposure to rising interest rates. Based on the current capital structure, 22% of the company’s debt has floating rates and a 100 basis point increase to reference rates affects annual net earnings by $16 million. This exposure is expected to increase as the company will utilize corporate borrowing facilities to fund a portion of the Kentucky Power acquisition in Q1/23.

The average price target at this moment appears to be about $15.30 (Cdn). A few analysts are telling investors to sell but most are saying to hold. Initiating a new position or buying more to average down, like I did, is not advised by the most analysts.

The bottom line here is that Algonquin may have trouble serving its debt and that means the dividend is expected to be slashed or even cut. If that happens, the stock price may suffer as well. But, it is possible an interest rate cut has already been factored into the price. Reducing, or even eliminating, the dividend will make AQN more profitable and thus the stock price may well increase on the news of a dividend cut.

For another viewpoint, please click the link: Should you catch the falling knife?