This Week’s Buy on Dip: 4.5% Dividend-Growth Stock


This week we took the opportunity to buy the dip in Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN). The company reports in USD and pays a USD dividend. So, we’re going to discuss the dividend stock on the NYSE and in USD.

The latest dip was triggered by an equity offering of US$1 billion. The reference price for the equity units is $15.00 per common share.

AQN stock Business Overview

Algonquin consists of two business segments: regulated utilities (natural gas, electric, and water) and non-regulated renewable energy (wind, solar, hydro, and thermal). Its renewable energy portfolio primarily consists of long-term contracts that have inflation escalations. Together, its portfolio allows it to generate stable earnings and cash flow.

Buy the Dip in Renewable Energy Stocks

Year to date, the stock has pulled back along with other renewable utility stocks. Investors can also consider Brookfield Renewable Partners L.P. (TSX:BEP.UN)(NYSE:BEP) and Northland Power (TSX:NPI). However, Algonquin provides the biggest yield of the three. It has also been a little more resilient, likely due to its exposure to regulated utilities that make up about two-thirds of its business.

AQN Chart

AQN data by YCharts

Q1 Quick Facts and 10% Dividend Increase

In May, Algonquin reported Q1 results with revenue growth of 36% to US$634.5 million and adjusted EBITDA growth of 17% to US$282.9 million. 

Management also instilled investor confidence by hiking its quarterly dividend by 10% to US$0.1706, equating to an annualized payout of US$0.6824 per share. This marks the company’s 11th consecutive year of dividend growth.

Notably, AQN’s next dividend is payable on July 15, 2021 to shareholders of record on June 30, 2021. So, if you want to receive the next dividend by the stock soon. The ex-dividend date should be June 29, 2021. So, you must own the stock by June 28, 2021 to receive the July 2021 dividend. 

Algonquin’s dividends are considered as eligible dividends for Canadian investors. No matter if Canadian investors buy AQN shares on the TSX or NYSE, AQN dividends received will be favourably taxed. 

Dividend Sustainability

Based on AQN’s Q1 adjusted earnings per share of US$0.20, its new quarterly dividend of US$0.1706 would suggest a payout ratio of 85%, which is a little high even for a utility. However, it’d be best to observe a full year’s payout ratio and how its dividend sustainability will change over the next few years. So, it’ll be good to review its payout ratio when 2021 is over and keep watch on the business, earnings and cash flow generation, and payout ratio over the next few years.

Importantly, the company has a project pipeline, a US$9.4 billion capital investment plan from 2021 to 2025. As a smaller player in the utility space, it provides an above-average growth profile with a growth rate potentially in the 6-8% range. Currently, across 10 analysts, they estimate AQN stock could increase earnings per share by 7.3% per year over the next 3-5 years. Sustainable dividend growth rate should be around 6-7%.

Valuation

Algonquin trades at a slight discount of 12% from the near-term consensus price target of US$17.40.

Source: Reuters

Any discount is welcome versus the expensive stock market, as suggested by the S&P 500 Shiller CAPE ratio. Notice that each peak in the graph was followed by a downturn, some more devastating for investors than others. It appears we could be closer to a peak than not. So, it’s even more important now (in an expensive market), to choose well-valued businesses.

S&P 500 Shiller CAPE Ratio Chart

S&P 500 Shiller CAPE Ratio data by YCharts

Technically

Technically, the stock trades at about the 50-day simple moving average after a pullback which is a decent entry point coupled with a 12% discount to the shares. 

Source: Stockcharts

Food for Thought

We don’t know if this correction in renewable energy stocks is over. However, we start generating income when we own shares. So, we’re happy to start a position in AQN at current levels.

Share Your Thoughts

  • Do you see other buy-the-dip opportunities?
  • What nice-yield dividend stocks are you considering buying?

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Disclosure: As of writing, we own shares of AQN, BEP.UN, and NPI.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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