Feature Article

Major infrastructure projects are vulnerable to big cost increases in inflationary times. So while disappointing, TC Energy’s (TSX: TRP, NYSE: TRP) announcement this month of a 30 percent increase in construction costs for its Coastal GasLink natural gas pipeline is hardly surprising.

There’s nothing like a solid start to the year to get investors excited for what’s to come. Some use January’s results as a benchmark, others the first six weeks of the year. But whatever the gauge, at this point it looks like the S&P 500 is off to one of its better beginnings in 2023.

Two Utility Report Card companies have cut dividends so far in 2023. Highlighted in the January 12 update “Algonquin Re-Sets: What’s Next,” combination utility and renewable energy producer Algonquin Power & Utilities’ (TSX: AQN, NYSE: AQN) is cutting its common stock dividend by -40 percent to 10.85 cents per share.

It’s been a difficult last few years for US investors to make real money in non-US stocks. One big reason is the US dollar, the strength of which has taken a big bite out of the US dollar value of foreign investments’ dividends and principal.

Algonquin Power & Utilities (TSX: AQN, NYSE: AQN) will update strategy on January 12 with an “Investor Update Call.” One potential course of action: The sale of its 42.49 percent interest in Aggressive Holding Atlantica Yield (NSDQ: AY). Expectations were high when Algonquin purchased ownership in the yieldco from its initial parent, bankrupt Spanish engineering firm Abengoa SA. And while the pace of drop downs to fuel growth has been tepid, the association has been positive for both sides—Atlantica’s dividend is now 6 percent higher than in December 2015, when it suspended its payout to deal with Abengoa’s cross-defaults.

Investors hate uncertainty. So it’s understandable that Dominion Energy (NYSE: D) shares sold off in early November, when the company replaced its CFO and announced a “top to bottom” strategic review. CEO Bob Blue stated the company would pursue “value-maximizing” actions, including “alternatives to our current business mix and capital allocation.” Dominion shares, however, now arguably price in the opposite: A cut in 6 percent annual earnings and dividend growth guidance to low single digits or worse.

Exactly half of our portfolio stocks posted positive total returns in 2022 and half negative. That matches up pretty well with the mostly neutral returns posted by our Aggressive Holdings (up 3.5 percent), Conservative Holdings (up 1.3 percent) and Top 10 DRIPs (up 9.5 percent). It’s also right there with the Dow Jones Utility Average’s 2.08 percent total return for the year. But the overall numbers do mask some pretty massive divergence among individual holdings. The biggest is the 156.5 percentage point difference in performance between our best stock Constellation Energy (NYSE: CEG) and our worst Algonquin Power & Utilities (TSX: AQN, NYSE: AQN).

We won’t have to wait long to hear Algonquin Power & Utilities’ (TSX: AQN, NYSE: AQN) plan for its dividend this year. The company’s Investor Call on January 12 will likely include revised guidance along with plans to corral debt and the Kentucky Power acquisition from American Electric Power (NYSE: AEP)—now blocked by the Federal Energy Regulatory Commission. Shares are pricing in a dividend cut of at least one-third. What management decides will likely depend on how fast it wants to reduce roughly $3.4 billion in variable rate debt, and whether it walks away from Kentucky Power.

The Dow Jones Utility Average outperformed the S&P 500 by more than 20 percentage points in 2022. And it did so despite the yield on the benchmark 10-year Treasury note rising from barely 1.5 percent to nearly 4 percent—no doubt baffling investors who consider utilities “bond alternatives.” As my table “Best and Worst of 2022” makes clear, however, there were some pretty dramatic divergences of share price performance inside the headline numbers. That’s clear from the 206.6 percentage point difference between the top and bottom performer of my Conrad’s Utility Investor coverage universe. And even a brief glance at this month’s Utility Report Card comments shows total returns are all over the map for the rest as well.

Europe’s unfolding energy crisis, rising interest rates and a heavy debt load: That accounts for elevated investor skepticism this year that Italy-based Enel SpA (Italy: ENEL, OTC: ENLAY) can hold to guidance of 10 to 13 percent earnings growth or even its generous dividend.