Algonquin Power is one of my Top Picks, this investor says

Beleaguered Canadian utility and renewable energy play Algonquin Power and Utilities (Algonquin Power and Utilities Stock Quote, Charts, News, Analysts, Financials TSX:AQN) has been a big disappointment for investors over the past half-year, and a recent dividend cut by management has heaped more worry on the company and stock going forward.

But portfolio manager Chris Blumas of Raymond James Investment Counsel is looking on the bright side with Algonquin, having just named it one of his three top picks for the next 12 months. Blumas says a number of factors have contributed to the downturn for AQN, which is off by over 40 per cent since September of last year and is now trading at around $10 per share, a level not seen since 2015.

“They had a really rough third quarter and a number of things didn’t go right for the company,” said Blumas, speaking on BNN Bloomberg on Wednesday. “They got hit a little bit with rising interest rates and they got hit a little bit with higher taxes. [But] I think this is a business whose earnings profile should stabilize and if you look at the valuation relative to its peers it’s very, very inexpensive.”

Already on a downward swing, AQN shares tumbled after its Q3 2022 numbers were released in November, showing a loss of US$27.9 million and a reduced outlook, with management calling for full 2022 adjusted net earnings of $0.66-$0.69 per share compared to its previous guidance of $0.72-$0.77 per share.

Questions have also been raised about Algonquin’s continued pursuit of Kentucky Power, a deal which was denied by the US Federal Energy Regulatory Commission (FERC) in December, 2022. Nevertheless, Algonquin management reiterated in a business update last month its intention to keep working towards a deal. In the same update, Algonquin announced a cut to its quarterly dividend, moving it from $0.1808 per share to $0.1085.

Blumas thinks even with the smaller dividend the stock is attractive.

“The assets are good. I don’t think this is one that you want to just punt out of the portfolio and say, Enough with it, because you’re giving up too much value. It’s around 12x earnings and even with the dividend cut the yield is almost 6 per cent,” he said.

“There’s a reasonable path to somewhere around $15 over the next two to three years, so I think this is one you don’t want to give up on too early,” he said.