'Crisis in confidence': Algonquin Power stock upgraded, with a catch

Wells Fargo wants to see "aggressive strategic actions to put the company on a firmer financial footing"

Following a roughly 40 per cent collapse since November, Algonquin Power & Utilities shares (AQN.TO)(AQN) have been upgraded to "overweight" by a Wells Fargo analyst. But there's a catch.

Citing headwinds from higher interest rates and inflation, to construction delays for renewable energy projects, the Oakville, Ont.-based power utility slashed its 2023 profit guidance when it reported third-quarter financial results last year. The "pressure" CEO Arun Banskota described on a Nov. 11 conference call with analysts sparked fears the company's hefty dividend may be in jeopardy, and raised doubts about Algonquin's ability to finance planned investments.

Banskota, who joined Algonquin in 2020, is set to give a business update before markets open on Jan. 12.

Wells Fargo's Neil Kalton says the company is facing a "crisis in confidence." His upgrade to "overweight" from "equal weight," with a $9 price target for U.S.-listed shares, hinges on the announcement of "aggressive strategic actions to put the company on a firmer financial footing."

"Such actions include a material dividend cut and a paring back of capital investment," he wrote in a Jan. 5 note to clients. "The outcome of this update will have significant implications on our thesis."

Kalton says Algonquin's roughly 10.5 per cent dividend yield dwarfs the 3.5 per cent average among peers, and "never truly squared with the company's aggressive, capital-intensive growth ambitions."

"Hindsight is 20/20, and we understand how the board of directors could become hostage to the [dividend] policy, especially given the high retail ownership (>50 per cent)," he wrote.

Adding to the uncertainty surrounding Algonquin is the company's proposed $2.6 billion acquisition of Kentucky Power through its American subsidiary, Liberty Utilities.

In mid-December, U.S. federal regulators denied the transaction. Termination of the deal requires Algonquin to pay the sellers, Ohio-based American Electric Power, a US$65 million break fee under certain circumstances.

"The path forward remains unclear in light of FERC's (Federal Energy Regulatory Commission) rejection of the deal," Kalton wrote. "We think management will publicly express a commitment to complete the $2.6 billion acquisition."

Toronto-listed Algonquin shares have fallen nearly 60 per cent since their peak above $22 in early 2021. The stock was essentially flat on Friday, adding 0.21 per cent to $9.47 as at 10:35 a.m. ET.

Algonquin is not the only utility under pressure as of late. Calgary-based TransAlta Renewables (RNW.TO) shares have tumbled more than 38 per cent over the past 12 months.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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