Friday, April 8, 2016

Five Canadian Utility Companies with Growing Dividends

In order to improve the diversification of my portfolio across different industry sectors, I have been considering adding a utility company to my holdings. As a preliminary step in my research process, I constructed the below table to summarize some key indicators for five utility companies that meet various dividend growth, market capitalization, and financial strength considerations . For those readers unfamiliar with the utility sector in Canada, the below table might serve as a starting point for your own research.

CU
ATCO
FTS
EMA
AQN
P/Etrail
32.4
29.3
15.7
17.7
25.5
Yield
3.60%
2.90%
3.70%
4.00%
4.70%
EPS Payout
76.40%
74.00%
38.40%
63.30%
104.70%
# Years Div Gro
45
23
42
9
6
1-yr Div Growth
10.20%
15.20%
10.30%
18.80%
10.00%
5-yr Div Growth
10.10%
14.90%
5.60%
7.90%
9.90%
1-yr Rev Growth
-9.30%
-9.20%
24.10%
-3.40%
9.10%
5-yr Rev Growth
3.80%
3.20%
12.60%
11.80%
41.50%
1-yr EPS Growth
-55.90%
-63.50%
85.00%
-3.90%
45.00%
5-yr EPS Growth
-7.00%
-11.50%
10.20%
10.40%
8.80%
S&P Rating
A/Neg
A/Neg
A-/Neg
BBB+/Neg
BBB/Neg

My primary observation from the above comparison is that there is no single dominant utility company that immediately stands out based on superior metrics across the board.  Although Canadian Utilities (“CU”) has the longest standing record of annual dividend increases at 45 years, it is the most expensively priced and has seen EPS contract at a 7% compounded rate over the last 5-years.  ATCO, which is CU’s parent company, has impressive dividend growth rates, but has the lowest dividend yield and earnings contracting at an even worse rate than CU. Emera (“EMA”) offers a fair 4% dividend yield and decent dividend growth rates, but their one year revenue and EPS numbers are less than stellar. Although Algonquin Power & Utilities (AQN) has the highest dividend yield, their EPS payout of over 100% and lowest credit agency rating of the bunch given me pause. Furthermore, AQN is far from cheap at 25X last year’s earnings.

This leaves me considering Fortis (“FTS”) which offers a middle of the road yield, decent dividend, revenue, and EPS growth, and the lowest payout ratio, at the cheapest valuation. The main reason why Fortis is relatively cheap is their planned USD 11.3B proposed acquisition of ITC Holdings Corp, a US-based electricity transmission operator announced in February 2016. The acquisition would be financed through debt and equity, and introduces integration risk given Fortis’s smaller comparable size evidenced by their CAD 11.2B market capitalization. As an investor, it is my preference to steer away from companies currently undertaking transformational acquisitions, as they introduce a greater degree of uncertainty concerning the combined entity’s future prospects.

With no Canadian utility company that leaps off the page at me currently, I think it is best to hold onto my capital until a clear opportunity presents itself.

Do you hold or are you interested in any of the five utility companies outlined above? 

5 comments:

  1. Have you considered NPI?

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    Replies
    1. I had not, but thanks for bringing it to my attention. My initial glance shows me a dividend that has been held constant since 2010, negative EPS in every one of the last six years but one, but with a BBB/Stable issuer credit rating. Nothing spectacular, but another company to add to my list to monitor :) Thanks!

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  2. Good post DIH. Thanks for sharing.

    I own my shares of utility stocks with ACO.X and FTS. I'm happy with both, although a little heavy on ATCO.

    It's true for FTS. But, eh, be a little adventurous! It's for the long run. ;)

    ReplyDelete
    Replies
    1. Merci mon ami. Je suis d'accord que FTS est le plus interessant de la gang...mais je ne suis pas tres presse d'investir avec leur grand achat en progress. If the transaction hits a regulatory snag, or if they have a bad quarter that causes the stock price to drop, I could use that as a buying opportunity....I do think they'll be fine in the long-term.

      Bon fin de semain!

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