Sector tailwinds will keep the renewable energy space looking good for the foreseeable future, says portfolio manager Darren Sissions, which means better times ahead for Canadian renewable energy stock Algonquin Power (Algonquin Power Stock Quote, Charts, News, Analysts, Financials TSX:AQN).
Shares of Algonquin Power have tumbled in recent weeks, falling off from around $20 in early April to now a stitch under $17. That puts the stock at a one-year return of negative 12 per cent, not including dividend, which is definitely in the red but perhaps not as bad as all that, especially in comparison to stocks in other sectors of the market. The broad-based S&P 500 Index is down a similar 12.6 per cent over the past year, while the tech-focused NASDAQ is down 23.5 per cent.
“All things considered that’s an outperformance [for Algonquin], isn’t it?,” said Sissons, vice-president of Campbell Lee & Ross, who spoke on a BNN Bloomberg session on Friday. “It feels a little painful, but I think at a high level, higher interest rates are going to factor into higher rate cases for the regulated assets, so moving forward I think that’s interesting.”
One year ago, Sissons had recommended Algonquin Power as one of his top picks for the 12 months ahead, and while the result hasn’t unfolded quite as planned Sissons still likes AQN and thinks investors should be taking notice of the pullback.
“I think there’s going to be scope for more renewables growth, so at these levels we would be buyers and we continue to like this story,” he said.
With a market capitalization of about $11 billion, Algonquin currently sports a dividend north of five per cent (5.5 per cent in fact), and the company has been in an expansion phase for a while now, with the results coming across in its financials. AQN boasted a 36 per cent revenue increase for the 2021 year over 2020, with adjusted earnings up 23 per cent to $449.6 million. Algonquin aims to spend $12.4 billion on capex between 2022 and 2026, with 30 per cent aimed at renewables and 70 per cent at regulated services.
More recently, for the company’s first quarter 2022 Algonquin’s revenue was up 16 per cent year-over-year to $735.7 million and adjusted net earnings were up 13 per cent to $141.3 million.
One of the big news items recently for Algonquin was winning approval from regulators in the state of Kentucky for the pending acquisition of Kentucky Power, first announced this past October. That deal would see Kentucky Power, a state-regulated electricity generation, distribution and transmission utility bought for $2.846 billion and make up part of Algonquin’s multi-year “Greening the Fleet” initiative that sees it transforming its energy grid to renewable sources. Algonquin said Kentucky will add over $2 billion of regulated rate base assets and the company aims to replace over 1 GW of fossil fuel generation with renewable energy.
“The acquisition of Kentucky Power and Kentucky TransCo is a continuation of AQN’s disciplined growth strategy, adding to its regulated footprint in the United States. Kentucky Power offers an opportunity for AQN to utilize its ‘greening the fleet’ capabilities in a complementary and constructive jurisdiction,” said Algonquin President and CEO Arun Banskota in a press release.