Dividend Alone Doesn’t Make Up For Lack Of Growth

CU - Canadian Utilities

Canadian Utilities is one of the largest utilities in Canada. Atco Ltd is its holding company with more than 50% stake in it. Canadian Utilities has core investments in electricity, pipelines & liquids and retail energy business units, as well as its international operations in Australia and Latin America. Its segments are Electricity (more than 70% of earnings), Pipelines & Liquids (~40%) and corporate and others (~-10%). 

The company owns an extensive network consisting of 87,000 km of electrical powerlines, 64,500 km pipelines, 21 global generating plants with more than 2,500 MW in generating capacity, 85,200 cubic meters per day water infrastructure capacity and natural gas and hydrocarbon storage capacities. Canadian Utilities is a $22 billion company with a globally diversified portfolio. Canada is its principal place of business accounting for 95% of revenues, while Australia constitutes ~4% and other countries are at 1%. The company is looking at expanding its footprint in other global markets. It already made an entry to Mexico’s wholesale electricity market. Canadian Utilities is a large utility company providing integrated solutions to customers across Canada.

Investment Data

Revenue Growth & Market Exposure

Canadian Utilities is a regulated utility with 86% of its earnings coming from regulated sources. The remaining 14% is from long-term contracted assets. The company owns regulated electric and gas distribution and transmission assets worth $22 billion serving more than two million customers around the world. Canadian Utilities engages in delivering integrated energy and industrial water solutions; electricity generation, transmission, distribution; and related infrastructure solutions to its customers. The company serves a wide range of industrial and commercial customers and has a consistent record of quality service and products and customer satisfaction. Canadian Utilities provides innovative and customer-focused infrastructure solutions. Given its large scale and inherent cost controls, Canadian Utilities has been successful in achieving better operational efficiencies.

The North is regarded as a long term growth area for Canadian Utilities and the company maintains strategic investments and partnerships across all three northern territories. During the year, Canadian Utilities continued to expand its regulated base of earnings and entered into definitive agreements to sell its non-regulated electricity assets. In May 2019, Canadian Utilities entered into agreements to sell its entire Canadian fossil fuel-based electricity generation portfolio and completed the sale of its entire 2,100 MW non-regulated electricity assets recently. The company also entered into definitive agreements to sell Alberta PowerLine partnership in June 2019 and is making good progress on the sale. Canadian Utilities continued to execute on its $3.6 billion capital investment plan focusing on building a globally diversified portfolio of utility and energy-related infrastructure assets, over the next three years.

The company regularly invests in regulated utilities and long-term contracted assets, which support stable and secure cash flows. It has more than doubled its asset base by investing ~$15 billion in predictable, regulated utilities and long-term contracted energy infrastructure in the last decade. It has come a long way in improving its earnings quality today, with regulated earnings now accounting for more than 85% of total earnings from less than 50% back a decade ago. The electricity transmission 2018 and 2019 general tariff application decision and the natural gas pipeline 2019 and 2020 general rate application decision greatly benefited Canadian Utilities’ earnings so far in 2019. The company also continued to achieve rate base growth across most of its utilities.

The company continues to make good progress on regulatory decisions in electricity and natural gas transmission, growth in the regulated rate base, earnings growth in the hydrocarbon storage business, and cost efficiencies. Strong backing of ATCO company which is a leading diversified global corporation, further provides clear visibility to future growth.

Dividends

Canadian Utilities is a Canadian Dividend Aristocrat, a Dividend Achiever and has increased its dividend for 47 consecutive years since 1972. The company sports an impressive dividend yield of 4.3% and has compounded its dividend growth at a rate of ~10% CAGR over the last three and five years. Its payout ratio is also reasonable at 48%. However, the rate of dividend growth has slowed down in recent years to just 3% currently, from the earlier growth levels in the mid to high single digits. 

A disciplined approach to growth, strong financial and operating performance, continued investment in regulated and long-term contracted assets has helped the company maintain its dividend growth streak in the past. Its regulated business is expected to demonstrate strong growth through regular capital investments, ongoing earnings and rate base growth. The company has guided its rate base growth to be ~4% annually through 2021. With ~85% of Canadian Utilities’ revenue being regulated and the remainder supported by long-term contracts, the company enjoys very stable recurring earnings. Stable cash flows and a strong balance sheet have also resulted in strong credit ratings.

Canadian Utilities’ ongoing capital investment and high-quality earnings should drive utility asset growth in the future. The company is also moving towards cleaner sources of energy by divesting from its coal-fired electrical generation assets. Canadian Utilities is expecting a high-quality earnings base, on the back of strong investments in regulated utility as well as long-term contracted assets through 2021. These investments should support future cash flow and dividend growth. The company has continued its strong record of dividend growth. A stable payout ratio underpinned by highly regulated consistent earnings and an above average dividend yield offers income seeking investors a growing dividend. Investors can expect low- to mid-single-digit dividend growth going forward.

Competition

Canadian Utilities competes with several utility companies such as Fortis, Brookfield Infrastructure, Emera, Algonquin Power & Utilities Corp, having a huge presence in the US and Canada. Fortis is a leading Canadian utility company with assets worth $50 billion and operating through ten utility operators. About 60% of its business is in the US and the remaining 40% is from Canada. Other large competitors are Brookfield Infrastructure Partners and Algonquin Power & Utilities. The latter is another diversified generation, transmission and distribution utility based in North America.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:FTSFTSFortisUtilitiesUtilities - Regulated Electric0.6752.4624.3214.0321.513.740.03643.640.510741.910.094458Tollbooth - RegulatedNOYESYESNOCanada1
TSE:BIP.UNBIP.UNBrookfield Infrastructure PartnersUtilitiesUtilities - Diversified0.6755.7117.0669.5521.510.800.05245.243.648942.150.144577Tollbooth - RegulatedYESYESNONOCanada1
TSE:HHHydro OneUtilitiesUtilities - Regulated Electric0.4825.7515.3918.5521.511.390.03943.940.729841.010.081335Tollbooth - RegulatedNONONONOCanada1
TSE:EMAEMAEmeraUtilitiesUtilities - Diversified0.7053.8713.1815.0421.513.580.04554.550.684442.450.105369Tollbooth - RegulatedNOYESYESNOCanada1
TSE:BEP.UNBEP.UNBrookfield Renewable Partners L.P.UtilitiesUtilities - Renewable0.4966.9411.980.0021.51-0.370.04404.401.000042.170.073337Tollbooth - UnregulatedNONONONOCanada1
TSE:CUCUCanadian UtilitiesUtilitiesUtilities - Diversified0.7134.459.3811.3721.513.030.05065.060.574841.740.141959Tollbooth - RegulatedNOYESYESNOCanada1
TSE:AQNAQNAlgonquin Power & Utilitties CorpUtilitiesUtilities - Renewable0.7517.689.3217.6521.511.000.04764.760.842340.620.134378Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NPINPINorthland Power Inc.UtilitiesUtilities - Renewable0.4834.336.6617.9621.511.910.03503.500.6283121.200.045535Tollbooth - UnregulatedNONONONOCanada1
TSE:ACO.XACO.XAtcoUtilitiesUtilities - Diversified0.6841.274.709.7021.514.250.04224.220.409641.740.166468Tollbooth - RegulatedYESYESYESNOCanada1
TSE:ALAALAAltaGasUtilitiesUtilities - Regulated Gas0.6416.034.4810.5821.511.520.05995.990.6316120.960.059936Tollbooth - RegulatedNONONONOCanada1
TSE:RNWRNWTransAlta Renewables Inc.UtilitiesUtilities - Renewable0.5514.503.8636.1521.510.400.06486.482.3490120.940.086945Tollbooth - UnregulatedNONOYESNOCanada1
TSE:INEINEInnergex Renewable Energy IncUtilitiesUtilities - Renewable0.5019.533.400.0021.51-0.520.03693.691.000040.720.036947Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BLXBLXBoralex Inc.UtilitiesUtilities - Renewable0.4031.533.040.0021.51-0.320.02092.091.000040.660.069855Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CPXCPXCapital Power CorporationUtilitiesUtilities - Independent Power Producers0.4528.142.96215.1721.510.130.06826.8214.769241.920.140256Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TATATransAltaUtilitiesUtilities - Independent Power Producers0.348.252.2816.0521.510.510.02062.060.333340.170.020604Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

Canadian Utilities proudly holds the longest track record of annual dividend increases of any publicly traded Canadian company. The company should continue its dividend growth streak driven by strong investment in regulated assets and infrastructure growth projects. It is also selling its entire Canadian fossil-fuel based power generation portfolio to focus on regulated and cleaner sources of energy. Canadian Utilities is making all efforts to expand its business into new markets and into new business lines and continues to pursue cost-savings and efficiencies. A solid history of dividend consistency and dividend growth further marks Canadian Utilities as a solid dividend play. It is a good candidate for investors seeking stable income growth, given its attractive dividend yield.

Investors seeking stock appreciation might want to look elsewhere. The TSX has not done much in the past years and neither has Canadian Utilities.

CU vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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