How safe do you think Algonquin Power & Utilities Corp.’s dividend is after the company cut its payout earlier this year? Is the six-per-cent yield sustainable?
Maybe. But I don’t think it’s a slam dunk.
As you may recall, I held Algonquin AQN-T in my model Yield Hog Dividend Growth Portfolio until I sold it last November when a dividend cut seemed likely. (I also sold a portion of my personal stake at the time, but I remain a shareholder.) A couple of months later, the company slashed its payout by 40 per cent in an effort to cope with the sharp rise in interest rates.
More recently, Algonquin’s chief executive officer stepped down, and the company put its extensive renewable power assets on the block as it aims to fortify its balance sheet and become a pure-play utility operator.
But even with these moves, the stock has continued to struggle, and the dividend yield has risen to about 6.4 per cent.
In a recent note, RBC Dominion Securities analyst Nelson Ng estimated that in 2025 – assuming Algonquin sells its renewables business and 42-per-cent stake in Atlantica Sustainable Infrastructure AY-Q by the end of 2024 – the company will generate about 48 U.S. cents of earnings per share. That would imply an elevated payout ratio of about 90 per cent based on the current annual dividend of 43.4 U.S. cents.
In that case, “there would be no dividend increases for several years” as the company relies on growth in its earnings to bring the payout ratio down to a more conservative level, he said.
“Alternatively, the board and the permanent CEO could right-size (reduce) the dividend to an immediately sustainable level.”
After the resignation of CEO Arun Banskota in August, Algonquin hired board member Christopher Huskilson, a former head of utility Emera Inc. EMA-PR-L-T, as interim CEO. Algonquin’s board is currently looking for a permanent replacement.
There are a lot of variables at play here, including – perhaps most important – the value Algonquin can realize from the sale of its wind, solar and hydro assets.
“Unfortunately, market conditions to sell renewables are not nearly as attractive as they have been over the past several years. Higher interest rates have weighed on the group and limited the price potential buyers are willing to pay,” said Cory O’Krainetz, an analyst with Odlum Brown, in a research note.
Even as the uncertainty is putting downward pressure on Algonquin’s stock price, Mr. O’Krainetz said the shares are trading at “a very attractive valuation, and we are confident that management will improve the business’ performance. The balance sheet has already been strengthened and leverage is likely to be further reduced over time.”
While that may be true, Algonquin is still very much a “show-me” story. Until there is some clarity on the renewables sale, or some definitive signs that interest rates have peaked, I expect the stock will remain in the doldrums and investors will continue to question the sustainability of the elevated yield.
I frequently read articles in The Globe about individual stocks where a performance comparison is made with the S&P/TSX Composite Index. I wonder if these articles are comparing apples to apples or apples to oranges. Often, but not always, the articles specify whether the stock’s performance is based on simple price return or a total return that includes dividends. But what about the index? Does the performance of the S&P/TSX include the dividends generated by the stocks in the index?
Typically, when the media report returns for the S&P/TSX (or any other index), they are referring to the simple return, excluding dividends.
If you’re interested in total return of the index over a certain period, including dividends, you have a couple of options.
One of the easiest methods is to use the free “compound returns calculator” at canadastockchannel.com. If you enter a stock symbol and specify a start and end date, the calculator will determine the stock’s total return for the period, as well as the annualized total return. It will also compare the stock’s total return to the simple price return of the S&P/TSX. But, as you pointed out, this is an apples-to-oranges comparison.
To determine the S&P/TSX’s total return, including dividends, simply enter the symbol of a low-cost index exchange-traded fund as a proxy for the index. For example, you could use the iShares Core S&P/TSX Capped Composite Index ETF XIC-T, which tracks the index closely thanks to its low management expense ratio of 0.06 per cent.
According to the calculator, XIC produced a total return of 8.53 per cent for the year ended Aug. 31, which is very close to the one-year total return for XIC of 8.43 per cent provided on the iShares website. For comparison purposes, iShares also provides the total return for the index, which was 8.49 per cent over the same period. These numbers don’t match exactly, but they are pretty darn close.
Another option for determining the index’s performance, including dividends, is to look up historical values for the S&P/TSX Capped Composite Total Return Index. This index – which computes its daily value assuming all dividends were reinvested – is not as widely reported as the simple S&P/TSX. You can find it by entering the index’s name into the search box at investing.com.
Once you have determined the starting and ending values for the S&P/TSX Capped Composite Total Return Index over a certain period, the percentage change represents the index’s total return for that time frame.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl