The 2022 stock performance of Algonquin Power and Utilities (TSX:AQN) has been utterly dismal. For a service that was formerly regarded as safe to use to decline by more than 40% in a year is quite unusual. However, since disclosing worse-than-expected third-quarter results, its stock has plunged precipitously, and it has since stabilized.

Why is Algonquin stock down so much in 2022?

The business has traditionally supported a plan for higher growth than average (at least for a utility). Algonquin stock touted 7-9% annual adjusted earnings-per-share growth for the following five years during its 2021 Investor Day.

However, third-quarter earnings were wiped out by growing costs due to numerous project delays and higher-than-expected levels of variable-rate debt. Algonquin was compelled to reduce its 2022 guidance and mentioned that it might change its longer-term growth projection.

Current and potential investors are unsure about what to do as a result. Here are a few arguments for and against purchasing the shares. Whether to buy, sell, or hold must ultimately be made depending on your patience, contrarianism, and risk tolerance.

Why Algonquin stock could be interesting

Algonquin stock may be attractive for investors prepared to take on significant risk. First off, it is currently quite affordable. Whereas many utilities are trading with mid-teens earnings multiples, it trades for about 10 times earnings. It offers a portfolio of excellent assets and a solid track record of delivering market-beating returns.

Second, its 9.9% dividend yield would appear to be quite alluring. I say this with a lot of suspicions, though. Besides the market crash in March 2020, I have rarely seen a stock maintain a dividend yield over 8% for an extended time.

The market has priced a dividend reduction, and frequently the market is accurate. If you decide to purchase this Algonquin stock, do it as a contrarian value play rather than an income-producing investment. The company’s dividend distribution is currently very speculative because neither earnings nor cash flow supports it.

Keep in mind that Algonquin management purchased stock for over $1 million. Insider purchases frequently indicate that management may not be as concerned as the market suggests, which is a bullish indicator. There are, however, still more causes to exercise caution.

Why should you wait

Algonquin stock may need to take dramatic actions to strengthen its balance sheet if the current debt/operating problems continue (and earnings continue to fall). This can entail liquidating valuable assets, renegotiating debt, issuing additional shares (at an unfavorable time or price), or cutting the dividend.

Algonquin already has a substantial debt (net debt to earnings before interest, taxes, depreciation, and amortization of 8.5 times). To pay for the purchase of Kentucky Power, it will have to take on more floating-rate debt. This might further reduce income and result in credit re-rating, raising the cost of borrowing.

Overall, the stock is quite expensive due to the balance sheet problems. The stock is also affected by macroeconomic difficulties, which are only anticipated to worsen over the coming year.

Play it safe and stay on the sidelines

Even if this is the worst-case scenario, it is one factor that makes the market so wary of Algonquin stock. There are too many things that could go wrong for its firm today, given the risks. Therefore, it is not the most secure investment, mainly if you acquire it for dividend income.

Algonquin will hold an Investor Day soon. Insight into Algonquin’s plans may be improved due to this. I would hold off making a purchase decision until then.