What happened

Shares of Algonquin Power & Utilities (AQN 2.11%) crashed 31.7% in November, according to data provided by S&P Global Market Intelligence. It turned out to be the worst month for the utility stock in 2022 so far, with Algonquin shares now tumbling a whopping 49% year to date as of this writing.

Utility stocks typically carry large amounts of debt and have, therefore, taken a beating this year amid rising interest rates. Algonquin shares started to feel the heat as well in recent months, but a company announcement last month triggered panic selling among investors, especially those who own the stock for its dividends. The question on investors' minds now is whether Algonquin's 9.7% yield is sustainable.

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So what

Algonquin's third-quarter earnings release from November revealed several challenges facing the company, including but not limited to higher production costs, rising interest expenses, and supply constraints that delayed some of the company's projects. The result: Algonquin suffered huge losses and trimmed its outlook for the full year, despite growing its revenue by 26% year over year in Q3.

Algonquin now expects to earn $0.66-$0.69 in adjusted earnings per share (EPS) in 2022 versus its previous EPS guidance of $0.72-$0.77. Adjusted EPS excludes the impact of nonoperating items, such as gains or losses on investments and from foreign exchange.

Investors, of course, weren't happy to hear this, and some dumped the utility stock in fear of more downsides ahead. The sell-off was exacerbated after analysts from at least five firms rushed in to slash their price targets on Algonquin stock soon after it cut its outlook.

The biggest fear is a possible dividend cut, as Algonquin's dividend per share exceeded its adjusted EPS in the first nine months of the year.

Now what

Algonquin grows primarily through acquisitions and is now in the process of acquiring American Electric Power's Kentucky utility and transmission businesses for $2.6 billion in January 2023. This deal, in fact, was first announced in late 2021, but the delay now means Algonquin may have to raise funds at a higher interest rate or issue stock to fund the acquisition and other growth projects. While the first will only add to the company's expenses, the latter will dilute the wealth of existing shareholders.

What sounds more worrisome is management now stating the need to evaluate its "longer-term targets and financial expectations," given the macroeconomic challenges. 

There's a chance Algonquin will review its dividend as well, but I wouldn't expect a company that has increased dividends every year since 2011 to cut it. Instead, Algonquin could announce a smaller dividend hike next year. For example, it increased its dividend by only 6% in 2022 versus 10% in 2021.

From that standpoint, although Algonquin stock could still be under pressure, it's not a lost cause. The Kentucky acquisition should significantly expand Algonquin's regulated assets and customer base and help add stability to its earnings and cash flows. Meanwhile, the company is also expanding its renewables portfolio.

Investors should look out for key updates in Algonquin's investor and analyst day event in early 2023.