Algonquin Power & Utilities Corp T.AQN

Another dividend cut ?

[incomedreamer11]

Algonquin Power & Utilities Corp. (AQN-N, AQN-T) US$5.54 | C$7.57 Assessing Potential EPS Impact of Renewable Power Exit

Event

This note provides estimated earnings and dividend payout ratio sensitivities around the potential sale of Algonquin's non-regulated power segment and the company's 43% equity stake in Atlantica Sustainable Infrastructure (AY-US, not covered). We also provide an update for Q3/23 expectations; AQN is scheduled to release results on November 10 before market open.

Impact: POTENTIALLY NEGATIVE

In August, AQN announced its intention to pursue an exit of its nonregulated renewable power segment and focus on the core regulated utility segment. Renewable sector valuations have capitulated since this plan was announced, but we still expect that asset-recycling initiatives are in the company's mid-term plans. AQN is committed to sustaining a BBB credit rating, and differing rating agency parameters for the regulated and non-regulated segments arguably constrain growth potential. Our estimates do not factor-in any asset sales, pending clarity on potential valuation parameters, but, in our view, it is informative to consider the possible mid-term earnings impact.

We expect that an exit of the non-regulated renewable power segment and divestiture of AQN's equity stake in AY would be EPS-dilutive. On a pro forma basis, our 2025 EPS estimate would decline 21% to $0.45. Our estimates are based on a sale of the non-core assets at a 10.0x EV/EBITDA multiple midpoint and selling the AY stake at the current share price. We expect that the net proceeds would be earmarked for a combination of debt reduction and share buybacks.

At our potential estimates, the pro forma dividend payout ratio would be 96% of 2025E EPS. We believe that a payout ratio range of 60-80%, which is in line with the average of North American regulated utilities, would be more reasonable for this company. Recall that AQN lowered its dividend by 40% in Q2/23.

Our HOLD recommendation is unchanged, but we are lowering our target price to US$6.00 from US$8.00. Our lower target price reflects a wider NAV discount and more conservative valuation parameters.

TD Investment Conclusion We reiterate our HOLD rating. In our view, Algonquin's valuation discount is warranted by its compromised earnings base and constraints on attaining strong valuation parameters for its non-regulated business. 

[Accountprince]

If anyone out there still thinks that the investment advice from "analysts" is independant then look at the TD Investment conclusion.  The market is subject to manipulation constantly and it looks like these guys are part of the process.  How does a utility share price drop by 25% recently without news or any apparent change and then suddenly the market gurus alter their

[bmbruce]

Leaving TD's analysis aside, the core driving force behind the stock price decline is the combination of a significant increase in bond yields and the company's substantial debt load….over the past five days, the 10-year yield has shot up from 4.6% to 4.9%…. this surge in bond yields is causing particular concern due to the company's already high levels of debt, which may be amplifying

[1condor]

No doubt by todays action that another divvy cut is being priced in. Market is starting to finally see some decent value in several stocks...especially those sensitive to interest rates. The list is getting longer by the day. Good luck to those holding AQN during these tough times.

[Karl63]

I got out of this a while ago when in the high 9's; I was hearing rumours of a second dividend cut and that was it for me.  Trading is a complex matter - I try to make rules for myself in an effort to give some direction to chaos.  One rule that I've instituted for myself, from this point on, is to immediately dump any stock that has a dividend cut.  Had I done so with AQN

[SargeX]

Hey Karl Good work on both your AQN and T sells. I hope the cash you received is doing well wherever it now is. Besides, the AQN cut, we've had 5 other cuts (AX.UN, D.UN, HR.UN, ALA, IPL). We eventualy sold all of them and made money on all except D.UN (minor $9k loss). I thought AQN would be different as I thought they had really good assets, just bad management. I was certainly wrong but