Looking for a buy in the utilities space? Income seekers would do well with Algonquin Power (Algonquin Power Stock Quote, Chart, News TSX:AQN), says portfolio manager Brendan Caldwell, who likes the renewable and sustainable power space going forward.
Algonquin Power, which has now $11 billion in total assets covering sustainable and renewable power generation, transmission and distribution utilities in the US and Canada, has long-term contracted wind, solar and hydroelectric generating plants representing over two gigawatts of installed capacity and about 1.6 gigawatts of capacity under construction.
The company saw a nice run up in its share price leading up to the COVID-19 pandemic, which took the stock up to C$22 per share, but AQN has been stuck in sub-C$20 territory ever since, a common sight across the utilities space, which hasn’t seen the investor interest typical of periods of volatility such as the current one.
Instead, the market has favoured sectors like tech and biotech and kept names like Algonquin struggling in negative territory for the year.
But there’s good value in owning Algonquin, said Caldwell, not in the least due to the company’s attractive dividend, which currently boasts a yield of 4.3 per cent. Caldwell says the market will come around soon enough on AQN, as the renewable energy space has a long runway ahead.
“Companies that have the ability to continue to grow their dividends tend to outperform companies that are in danger having those dividends cut and a company like Algonquin Power has been consistently growing its dividend,” said Caldwell, CEO of Caldwell Investment Management, speaking on BNN Bloomberg on Monday.
“I believe that the part of the utilities business that it’s in will likely continue to grow and expand, so I think that you’ll see that company’s stock price do well as the amount it’s able to return to its investors continues to grow,” Caldwell said. “A company that’s paying more and more to its investors, you can see why the stock price would do better and better.”
But while Algonquin’s longer-term prospects may look good, its fate during COVID-19 is a little less rosy, as energy consumption has been down across its commercial and industrial customers due to business shutdowns, both temporary and permanent.
AQN’s latest quarterly results told the tale. The company posted its second quarter 2020 financials in mid-August, featuring flat revenue compared to a year earlier while adjusted EBITDA fell from $190.0 million in Q2 2019 to $176.3 million. Adjusted earnings fell to $0.09 per share compared with $0.11 per share a year earlier. (All figures in US dollars except where noted otherwise.)
“We continue to execute on our five-year $9.2 billion capital program and are making good progress on projects under construction,” said CEO Arun Banskota, in an August 13 press release. “We are also pleased that in line with our ESG commitment and our commercial and industrial growth strategy, we have reached a framework agreement with Chevron where APUC will seek to develop, build and operate renewable energy solutions taking advantage of Chevron's global operations to reduce their carbon footprint over the
next several years.”
Flexing some of that M&A muscle, Algonquin this month announced a $92.3-million purchase of 53.5 per cent of Chilean water and wastewater provider Empresa de Servicios Sanitarios de Los Lagos, while the $365-million purchase of Bermuda Electric Company is expected to close this quarter.