Why is Algonquin Power rallying? Any news about the dividend is good news

Then Algonquin Power and Utilities Corp. AQN-T announced Tuesday that it will hold an investor call next week, sending stock prices soaring — suggesting that the mere announcement of an announcement was enough to generate interest in hedged stocks.

Could the clarity on Algonquin’s dividend, which is sure to come, give it another lift?

The Canadian renewable energy company has been a big question mark for almost eight weeks.

After disappointing quarterly results in November and a warning about long-term growth targets, the share price fell to multi-year lows. At the end of December, it was down 57% from its most recent high in April.

The main concern: As higher interest rates drove up the company’s borrowing costs, Algonquin wasn’t generating enough cash to support its dividend and growth plans. Growth or dividend should probably have cut it.

The rise in the dividend yield – which rose more than 10 percent as the share price sank – reflects the need for a distribution cut.

For investors who once flocked to Algonquin for its combination of attractive renewable energy assets, the stability of a regulated utility and rising payouts, this took an unfortunate turn. Uncertainty about how severe the dividend cut could be, if it does happen, could make it even worse.

But this week’s encouraging 9.6 percent gain in the share price offers a glimpse of what may come next: with clarity, the stock could begin a recovery, even with a reduced dividend.

Credit Suisse analyst Andrew Kuske said in a note Thursday that next week’s investor update “provides the next very visible near-term catalyst for a very interesting stock situation.”

He added: “There is a path to meaningful value creation,” which may involve more emphasis than asset sales and renewable energy generation.

A reduction in dividends cannot be ruled out either, of course. But there are plenty of examples where depressed stocks have recovered after companies cut dividends, as a reduced payout brought relief that the worst was over.

After all, companies tend to cut dividends as a last resort, reinforcing the argument that such events tend to mark a low point in investor sentiment.

During the COVID-19 lockdowns in 2020, several Canadian companies cut or suspended dividends in an effort to conserve cash. In most cases, mark the cuts good buying opportunities long term

RioCan Real Estate Investment Trust AT REI Announced in December 2020, Starting in January 2021, his monthly distribution would be reduced by a third. From the announcement to the end of 2021, the price per unit increased by about 30 percent. RioCan increased its distribution in 2022, but remains below 2020 levels. (Full disclosure: I own RioCan units.)

CAE Inc. CAE-Tthe flight simulation company, saw its share price rise 68 percent by the end of 2021 after suspending its dividend in 2020. Although recovered, CAE does not currently pay a dividend.

Suncor Energy Inc. SU-T It cut its dividend by 55% in May 2020. Although the share price struggled in the months following the announcement, it recovered 47% by the end of 2021. Since then, the energy producer has increased its payout several times, now to a higher level than before. 2020 cutoff.

These companies experienced temporary setbacks related to the pandemic, which is not the case with Algonquin.

Algonquin complicates calculations in 2021 Kentucky Power Co. that he entered into a purchase agreement that was blocked by the US Federal Energy Regulatory Commission in mid-December, putting the deal in limbo.

“I don’t know how they’re going to adjust their dividend if they know if they’re going to go through with the Kentucky Power acquisition. Because it could make a big difference,” said Stephen Takacsy, CEO of Montreal-based Lester Asset Management, which sold Algonquin shares in 2021 after the deal was announced.

So far, the company hasn’t said anything about what’s coming next week. In a statement on Tuesday, Algonquin said its CEO and CFO will provide a business update on January 12.

But if disappointment is already creeping into the stock price, an indication of how Algonquin will navigate the coming year could push the stock further toward recovery. This week, the share price surge suggested that clarity is worth the gamble.