This has me scratching my head. Sure, objectively, Algonquin released some bad news, and it came clean about how rising interest rates are going to sting its bottom line. The company is not worth as much today as it was a week ago.
That said, a 32% sell off?! And, for a company that has the bulk of its revenues guaranteed by regulated government utility contracts?
Critics of Algonquin point to the fact that interest rates will continue to bite, and if the new acquisition doesn’t go as well as planned, a dividend cut or share dilution might be the harsh reality.
However, several company insiders, including its CEO, purchased over a hundred thousand shares of the company this week. And many dividend-conscious investors are looking at the current 9.6%-dividend yield and might be thinking, “even if this dividend gets cut in half, I’m still looking at 4.8%… what are we missing here?”
While it might be a while before Algonquin gets back to the $20-per-share level it recently enjoyed, I have to say that this looks to me like a classic case of panic spiralling and leveraged investing.
There is nothing in Algonquin’s earnings report suggesting it is worth a third less than it was a week ago. The company has 70% to 80% of its debt in long-term fixed rate agreements, and regulators will allow them to raise its revenues to some degree going forward (whether that fully matches inflation or not is tough to say).
Its dividend looks reasonably secure from an adjusted funds from operations (AFFO) dividend payout ratio perspective (what most utility companies use as their preferred dividend security metric).
Even if Algonquin has to pause dividend increases or cut its dividend for a year, the underlying investment philosophy of buying shares in a company that delivers water, natural gas and electricity to folks—with a side dish of renewable energy assets—still looks like a solid long-term option to me.
