Algonquin Power & Utilities Corp. (AQN) is a renewable energy and utility company with over $15 billion of assets in Canada, the United States, Chile, and Bermuda, notes Doug Gerlach, editor of Small Cap Informer.
Its Liberty Utilities and Liberty Power units provide regulated electricity, water distribution and wastewater collection, and natural gas utility services to more than one million customer connections, primarily in North America.
Algonquin Power’s growing portfolio of clean, renewable wind, solar, hydro, and thermal power generation facilities represents more than three gigawatts of renewable generation capacity in operation and under construction.
The company’s mission is to deliver clean water and energy solutions to its customers, so its focus is squarely on sustainable, low-carbon, sustainable initiatives worldwide.
The company’s operations are split into two groups. Its Regulated Services Group includes its utilities in Canada and the U.S. operating under the Liberty name. Its Renewable Energy Group is responsible for its international portfolio of renewable energy production, and its U.S./Canada generating assets.
In fiscal 2019, roughly 60% of operating profits came from the Regulated Services Group. This business mix is interesting to us as growth investors as it provides opportunities for growth but also for the stable base of revenues and earnings provided as a regulated utility.
The company was incorporated in 1988 and is headquartered in Oakville, Canada. Its stock was recently added to the S&P Global Clean Energy Index.
Algonquin Power’s revenues have grown at an annualized 22.6% since 2011, with earnings per share somewhat higher (though less consistent) at 24.9% average per year. In the first quarter ended March 31, Algonquin Power reported revenues of $634.5 million, an increase of 36.5% over the prior year quarter. EPS were $0.02 compared to -$0.13 in Q1 2020, while adjusted EPS were $0.20, up 5.0%.
The company’s wind operations in Texas were affected by the February 2021 winter storm, and the disruption in its operations forced the company to purchase energy in the elevated commodities markets to satisfy its contracts. Management believes that the incremental costs will be substantially recovered.
Algonquin Power is currently engaged in a multi-year strategic plan that includes $9.4 billion of identified capital projects targeted through 2025. These are projected to deliver rate base growth of more than 1.6 GW of sustainable new wind and solar capacity to its generating fleet.
The company sees President Biden’s clean energy initiatives as having the potential to create more investment opportunities as well.
Acquisitions and partnerships have factored largely into Algonquin Power’s historical business and we expect more of the same in the future. Analysts see Algonquin Power’s EPS increasing 8.75% per year in the next five years, and the company expects to grow adjusted EPS 8% to 10% annually. We project revenue growth of 7.0% and EPS growth of 9.0% through fiscal 2025.
Algonquin Power’s pre-tax profit margins have grown impressively in the last decade, reaching 50.7% in fiscal 2020. ROE has been on an uptrend as well, ending 2020 at 22.3%.
The utility’s debt load has also been declining consistently since reaching a peak in 2016, and long-term debt to total equity was 102.2% at year-end 2020, very respectable when compared to peers and the average of the renewable utilities industry group.
In recent years, the company has been paying about half of its earnings as dividends to shareholders, in line with industry averages. Management reports that its balance sheet has approximately $1.5 billion of available liquidity as of the end of the first quarter.
In the past, Algonquin Power has been valued as more of a growth investment, with P/E ratios often above 30 prior to 2018. Since then, the company’s multiples have been more in line with its changing business.
Our estimates of future high and low P/E ratios are more in line with the lower range of the last two fiscal years, so we expect a high P/E of 13.1 to be attainable and a low P/E ratio of 8.2 (its 52-week low P/E).
These selections result in calculated high and low prices in the next five years of $30.70 and $12.50, respectively. From the recent price of $15.45, the upside/ downside ratio is 5.2-to-1 and the projected annual total return is 18.4%. Shares are a buy up to $17.
Algonquin Power’s dividends have increased around 10% a year in the last decade, and the current yield is 4.4%. In a superheated market where it can be hard to find stocks to purchase at reasonable prices, a stock like Algonquin Power can provide a nice defensive hedge while also generating an income stream; it pays a dividend with a current annual yield of 4.4%.
