Though the broader equities sector enjoyed a modest boost lift on Thursday morning, public utility firm Algonquin Power (NYSE:AQN) — which emphasizes its renewable energy portfolio — dropped conspicuously. Management communicated a pair of bad news, first a significant slash to its quarterly dividend and second an earnings downgrade. On the disclosure, AQN stock dropped 6% in the morning hours before paring some of the pain to down 4%.
According to Yahoo Finance Canada, Algonquin announced plans to cut its quarterly dividend by 40% along with asset sales targeting $1 billion, all in an effort to bolster its finances and provide reassurances for stakeholders. Specifically, regarding the passive income, the company will lower the dividend to 10.85 cents from 18.08 cents per share. This action will take place in the first quarter of 2023.
For the asset sale, management reported that it will initiate protocols to cut capital costs and refocus its portfolio. Ultimately, the $1 billion target will help pay down debt and bankroll growth, per Yahoo Finance Canada.
Adding to the woes, Algonquin sees fiscal 2023 adjusted net earnings per share dropping to 55 cents from 61 cents. Previously, management forecasted net EPS of range between 66 cents to 69 cents.
“Over the Company’s history, we have built a solid foundation supported by the scale of our asset portfolio,” said Algonquin CEO Arun Banskota per the company’s press release. “However, we have reached an inflection point and, as markets continue to evolve, we must address the challenges facing the business.”
AQN Stock Dropped on a ‘Crisis in Confidence’
To be fair, Banskota expressed confidence in the turnaround strategy for AQN stock. “Let me be clear. I take the current situation very seriously,” the head executive told analysts on a conference call Thursday morning. “Regardless of the challenges we face, I’m holding myself and this management team accountable for improving our trajectory.”
Nevertheless, prior to today’s announcement, AQN stock enjoyed a sizable forward yield of 10.26%, according to Dividend.com. However, analysts and market observers long questioned the sustainability of the generous payout. For one thing, the average yield for the utilities sector currently pings at 3.75%.
Moreover, the payout ratio stood at a lofty 97.26%. Per Investopedia, the “dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.” Thus, a high ratio may attract questions. Prior to the disclosure, AQN stock featured 11 consecutive years of dividend increases.
Naturally, dividend-paying companies tend to do whatever is necessary to keep the payout as cutting it erodes shareholder enthusiasm. Unfortunately, that’s exactly what Wells Fargo analyst Neil Kalton warned about, stating earlier this month that AQN stock faces a “crisis in confidence.” Though Kalton upgraded AQN to “overweight” from “equal weight,” he stressed the importance of “aggressive strategic actions to put the company on a firmer financial footing.”
Why It Matters
Even those not holding AQN stock may still want to pay close attention to the underlying developments. According to Dividend.com contributor Sam Bourgi, “As one might expect, dividend cuts are more common during economic recessions. This was certainly the case following the dot-com bubble and the 2008 financial crisis, which impacted the dividend yield of various sectors, especially those tied to finance, technology and consumer spending.”
Still, a dividend slash might not be the end of the road for AQN stock. Several high-profile companies, including BHP (NYSE:BHP) and Wells Fargo (NYSE:WFC) bounced back after trimming their dividends.
However, Algonquin may need to start rolling up its sleeves quickly regarding its stated initiatives. Presently, TipRanks reports that AQN stock features a consensus “hold” view among covering analysts: two buys and seven holds.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
