Algonquin Power & Utilities Corp. AQN-T slashed its quarterly dividend by about 40 per cent Thursday in a much-anticipated move that the company blamed on challenging headwinds related to rising borrowing costs.
The share price of the Canadian-based utility and renewable power producer fell 4.2 per cent, or 42 cents, to $9.53 in Toronto Thursday. Even with Thursday’s decline, though, the share price is still almost 9 per cent higher than its recent low on Dec. 30.
The dividend reduction, which follows disappointing financial results in November and a soaring dividend yield of more than 10 per cent as the share price slumped, means the quarterly payout will fall to 10.85 U.S. cents a share from 18.08 U.S. cents.
Based on Thursday’s share price in U.S. dollars (the shares also trade in New York), the yield will fall to 6.1 per cent.
Arun Banskota, Algonquin’s chief executive officer, called the action one of the steps the company is taking in response to economic conditions that have driven up interest rates to multiyear highs as central banks confront rising inflation, threatening the company’s investment-grade credit rating.
“We have reached an inflection point, and as the market continues to evolve we are facing various challenges that are putting pressure on our growth rates and making our dividend payout unsustainable,” Mr. Banskota said during a call with analysts.
“As a result, we are taking decisive actions to address these challenges and strengthen our financial position,” he added.
The company expects that the lower dividend payout will save US$1-billion over five years. It also means that the payout ratio – which compares dividends paid with shareholders with profits – will decline from more than 100 per cent to a range of 71 per cent to 79 per cent, according to estimates from Bank of Nova Scotia.
Algonquin said it is committed to completing its acquisition of Kentucky Power, which the U.S. Federal Energy Regulatory Commission blocked last month.
It said it will reduce its capital expenditures by about 15 per cent and target about US$1-billion in asset sales. Also, it will end new common equity issuance for the next two years and suspend its dividend reinvestment plan to put a brake on shareholder dilution.
“Generally speaking, we see the steps the company is taking as prudent and should help reduce uncertainty surrounding the shares, though we have questions regarding the earnings outlook,” said Robert Hope, an analyst at Bank of Nova Scotia, in a note.
Algonquin expects it can generate net earnings of 55 U.S. cents to 61 U.S. cents a share for the 2023 fiscal year, excluding the potential impact of asset sales, down from an estimated 68 U.S. cents a share in fiscal 2022.
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David Berman