What happened

Shares of Algonquin Power & Utilities (AQN 0.09%) crashed this week and were down 18% through noon Friday, according to data provided by S&P Global Market Intelligence. The utility stock found itself at the receiving end of analysts' downgrades, and investors are now worried about the safety of Algonquin's dividend.

So what

Algonquin stock has fallen off the cliff since last Friday after its third-quarter numbers came out. Given the stock's dramatic fall since, you'd have expected its numbers to be a bummer. It was, however, a mixed quarter. Here are the key Q3 numbers you must know (all changes year over year):

  • Revenue: Up 26%.
  • Net loss: Up 600%.
  • Cash from operations: Down 41%.

Here's what happened: Despite its solid top-line growth, Algonquin suffered a huge loss and burned through cash rapidly as production costs rose, interest rates shot up, and supply constraints hit the construction of some renewable energy projects. A solar project, for example, was delayed on low solar module supply.

Management didn't mince words, with CEO Arun Banskota acknowledging that it was a "challenging quarter" for Algonquin, that its results fell short of management's expectations, and that the company wasn't "immune to the macroeconomic environment."

What's worrisome is that Algonquin expects these headwinds to linger and therefore expects to earn only $0.66 to $0.69 in adjusted earnings per share this year versus its previous guidance of $0.72 to $0.77 per share.

Not many saw this coming, and at least five analyst firms downgraded Algonquin stock this week, according to The Fly. Notable price target cuts include:

  • RBC Capital analyst Nelson Ng: $12 per share, down from $17 per share.
  • BMO Capital analyst Ben Pham: $11 per share, down from $17.50 per share.
  • TD Securities analyst Sean Steuart: $10 per share, down from $13 per share.

Now what

There are no two ways about it: Algonquin is facing a tough time.

Things could get much worse before they get better if interest rates continue to rise. As per Algonquin's own estimates, roughly 22% of its debt is subject to variable interest rates, and every 100 basis-point increase in interest rates could drive the company's annual interest expense higher by almost $16 million.

To top that, Algonquin also has debt worth about $100 million maturing in 2023. Chances are, it may not only have to refinance some portion of that debt at higher interest rates but also resort to a stock issue to raise funds for growth, such as its impending acquisition of Kentucky Power.

The tight liquidity situation raises another reason for concern: Algonquin has grown its dividends steadily in recent years, but where things stand now, that dividend growth could possibly slow down for this 9.4%-yielding stock.