Algonquin Power, AQN, may suffer near-term volatility

Algonquin Power & Utilities Corp. (AQN) lost about a dollar on the open this morning. Is this a harbinger of stock price moves to come or has the damage been done and is it time for the healing to begin?

AQN reported its second-quarter financial results. The adjusted EBITDA increased 12% and the adjusted net earnings year-over-year rose 16%. The company has reduced its common share dividend again, this time by approximately 40% to $0.0893 per share. The reduction is somewhat larger than anticipated. This second dividend reduction continues the move towards financial prudence as AQN positions itself as a pure-play regulated utility.

 

A note here about the anticipated payout ratio. Management believes the revised $0.3572/share annual dividend will result in a payout ratio of 60%-70% once the current regulated asset base approaches its full earning potential. The closer the company comes to a 60% payout ratio, the less chance another dividend cut will occur.

 

The company also announced it is selling its renewable energy business for approximately $2.5 billion. Some investors had hoped the renewable energy business would sell for considerably more. For some, this announcement was a disappointment. Still, the sale will strengthen the AQN balance sheet as it moves its focus to being a regulated utility operation. In the long term, this transition should enhance the quality of earnings thus creating long-term value for shareholders.

 

The overall market sentiment appears cautious thanks to the dividend cut. The ongoing strategic changes only add to the uncertainty. Today the price dropped approximately a dollar on all the news. In the short term the stock could lose more share value but it probably will not be a lot as the negative news appears to be priced into the stock value now.

 

Christopher Huskilson, the current Interim CEO of Algonquin Power & Utilities Corp., is  the former CEO of Emera Inc. Huskilson has over 20 years of experience in the energy sector. Now with Huskilson at the helm, Algonquin is enjoying excellent leadership. When Huskilson expresses belief in the company's ability to improve returns and reduce external funding needs, his words inspire confidence.

 

Still, I would not buy Algonquin today. That said, I would not sell Algonquin at a loss today. There are indications that the AQN stock price may climb over the short term and, although I am not happy with it, I can live with the 4.8% dividend calculated on the closing price ($7.42) last Friday.