Algonquin Power (Algonquin Power Stock Quote, Charts, News, Analysts, Financials TSX:AQN) has been hit with more than its share of gut punches this past week, taking the once-dependable utility stock to territory not seen for well over half a decade. And while it’s very tempting for investors to average down on what surely must be an over-anxious blip from the market, portfolio manager Ryan Bushell thinks you might want to wait a bit before diving in.
Already having a rough past couple of months, AQN really hit the skids last week after posting its third quarter financials, featuring earnings which dropped 27 per cent year-over-year and represented a miss of analysts’ consensus estimate. Add to that a sketchy guidance from management on the current fourth quarter and the market reacted strongly, pushing the stock from about $15 to as low as $10.34 on Tuesday.
Bushell said he’s interested in owning Algonquin but has concerns about the company’s renewable resource segment, which as a sector has been facing challenges.
“The renewable side of Algonquin is where they’re struggling right now and a lot of companies are struggling with supply chain costs, inflation and lack of resource, actually, which is something I’m looking to get more colour on at a conference coming up in terms of the reliability of solar and wind resource. But the distribution utility part of Algonquin to me is still very attractive,” said Bushell, president of Newhaven Asset Management, who spoke on BNN Bloomberg on Monday.
Part of the worry is about Algonquin’s dividend, which is upwards of a nine per cent yield at the moment and almost certainly at risk of being cut, seeing as the payout ratio is currently being projected at around 100 per cent compared to management’s target range of 80 to 90 per cent of earnings.
Another item that may be hampering AQN is its planned acquisition of Kentucky Power, one which awaits approval by US regulators and will now come with a price tag of US$2.6 billion, including about US$1.2 billion in debt.
But Bushell said the Kentucky Power deal is likely to turn out fine in the end.
“They [recently] got a better adjustment in price. It’s still expensive on a long term basis,” he said. “We saw this with AltaGas, as well. The company does the acquisition and, ‘Oh, they paid too much, they paid a billion too much,’ and the market hammers the stock down, short sells it, forces them to cut their dividend. And, lo and behold, [AltaGas’ asset] is performing very well now right and will perform well for the next few decades. It’s a similar thing with Algonquin.”
“If we’re getting reasonable assurance [from Algonquin management] and we feel confident that the company is going to get through the current period of weakness, then we would start buying after that. But we’ll have to have a chat with the company and see where things are at,” he said.