Algonquin Power is a Buy right now, this investor says

There may be just cause to be wary of stocks that respond poorly in rising interest rate environments like the current one, but that’s not the case for Algonquin Power & Utilities (Algonquin Power & Utilities Stock Quote, Charts, News, Analysts, Financials TSX:AQN), according to portfolio manager Chris Blumas who likes AQN after the recent rally in its share price.

“Algonquin Power is a name that I do really like. It’s a regulated utility and a renewable energy producer and it’s a name that I do own on behalf of clients,” said Blumas of Raymond James Investment Counsel, who spoke on BNN Bloomberg on Wednesday. 

“I think the valuation is really attractive right now. And in terms of its dividend, it’s very sustainable and they have been growing their payout over time,” he said.

We all know it was coming and here it is, a half-percentage interest rate hike by the Bank of Canada as the central banker looks to rein in inflation that has hit levels not seen in decades. The bank’s governing council settled on .5 per cent, bringing its benchmark to one per cent while calling for more raises up ahead and pointing to the two to three per cent range as a likely target.

As the theory goes, high dividend paying stocks like utilities traditionally do less well in high interest rates environment as other investment vehicles start to look more attractive. So far, it’s unclear whether that will come to pass this time around. Utilities are doing very well, in fact, including Algonquin which is up eight per cent in 2022. 

“I know you hear a lot of people are very cautious on utilities right now just because the threat of rising interest rates over time and I think with this type of strategy, what you really have to do is skew towards some of the interest rate sensitive names that are able to grow and I think Algonquin is a perfect example of that,” said Blumas.

“It’s a regulated utility so it is a bit interest rate sensitive but it has a really good growth profile and a solid management team. So this is what I would definitely buy at current prices,” he said.

Algonquin has been following through on its growth strategy which includes a $12.4-billion capital expenditure plan from 2022 to 2026 and its Greening the Fleet push for a larger and larger chunk of its business coming from renewable energy, with the end goal of net-zero generation by 2050. The company has been busy with M&A over the past year, announcing the planned $2.8-billion acquisition of Kentucky Power Company as well as the purchase completed earlier this year of New York American Water for $608 million. 

“We are pleased that the Company has successfully delivered on many of its strategic priorities in 2021, including the continued execution of several exciting new renewable projects and a further advancement of sustainability initiatives. Despite weaker weather conditions, we are pleased to report solid fourth quarter operating results from the Company’s diversified and resilient business model,” said President and CEO Arun Banskota in the company’s fourth quarter 2021 press release in early March.

AQN’s 2021 revenue was up 36 per cent year-over-year to $2.286 billion, while adjusted EBITDA was up 24 per cent to $1.077 billion and adjusted net EPS were up 11 per cent to $0.71 per share. The company said the rise in adjusted earnings came largely from new renewable power facilities that came online over the year including its Maverick Creek Wind project in Texas and its Altavista Solar Project in Virginia. All told, Algonquin ended the 2021 year with $16.8 billion in assets, up from $13.2 billion a year earlier.

Looking ahead, management is calling for 2022 adjusted net EPS to be within the range of $0.72 and $0.77 per share. On the dividend front, Algonquin is currently paying a yield of about 4.3 per cent, with the company having increased its dividend each year over the past ten years and currently targeting a long-term payout ratio of between 80 and 90 per cent.

Algonquin next delivers earnings on May 12 with its first quarter 2022 financials.