Dividend Kings In Focus: Canadian Utilities

Up to date on October fifth, 2023 by Aristofanis Papadatos

The Dividend Kings are a gaggle of simply 50 shares which have elevated their dividends for no less than 50 years in a row. We consider the Dividend Kings are among the many highest-quality dividend progress shares to purchase and maintain for the long run.

With this in thoughts, we created a full checklist of all of the Dividend Kings.

You possibly can obtain the total checklist, together with essential monetary metrics reminiscent of dividend yields and price-to-earnings ratios, by clicking on the hyperlink under:

Annually, we individually overview all of the Dividend Kings. The following within the collection is Canadian Utilities (CDUAF).

Canadian Utilities has elevated its dividend for 50 consecutive years, which makes it the one Canadian firm on the checklist of Dividend Kings. This text will analyze the corporate in higher element.

Enterprise Overview

Canadian Utilities is a utility inventory with roughly 5,000 workers. ATCO owns 53% of Canadian Utilities. Based mostly in Alberta, Canadian Utilities is a diversified world power infrastructure company that delivers options in electrical energy, pipelines & liquid, and retail power.

The corporate has a protracted historical past of producing regular progress and constant earnings by way of the financial cycle.

Supply: Investor Presentation

On July twenty seventh, 2023, Canadian Utilities reported its Q2-2023 outcomes for the interval ending June thirtieth, 2023. Income for the quarter amounted to $663 million, which was 6% decrease year-over-year, whereas adjusted earnings per share decreased 27.5%, from $0.51 to $0.37.

The lower in revenues resulted primarily from value efficiencies generated by Electrical energy Distribution and Pure Fuel Distribution over the second-generation Efficiency Base Regulation (PBR) time period now being handed onto prospects beneath the 2023 Price of Service rebasing framework, in addition to the choice of AUC (Alberta Utilities Fee) to maximise the gathering of 2021 deferred revenues in 2022 because of price reduction offered to prospects in 2021 (resulting from COVID-19 on the time).

The substantial decline in earnings was prompted primarily by diminished revenues, which squeezed the corporate’s margins, coupled with the influence of inflation on the general prices of the corporate.

In the course of the quarter, Canadian Utilities invested C$332 million in capital tasks. Roughly 86% of this quantity was allotted on its regulated utilities enterprise, with the remaining 14% invested in its power infrastructure enterprise.

Development Prospects

By benefiting from a steady enterprise mannequin, Canadian Utilities can slowly however progressively develop its earnings. The corporate persistently invests considerable quantities in new tasks and advantages from base price will increase, which are inclined to hover between 3% and 4% per 12 months.

As progress within the regulated utilities area stays somewhat restricted, Canadian Utilities is now looking for to broaden its enterprise by way of the strategic acquisition of renewable technology belongings. The $730 million funding ought to present the corporate with fast scale and future progress by way of the event pipeline and benefit from the qualities of long-term buy energy agreements which are widespread in wind tasks. Additional, administration expects that this funding will probably be accretive to money move and earnings in 2023.

Combining the corporate’s progress tasks, the potential for modest margin enhancements, and – as voluntarily pursued – the postponed price base will increase, we preserve our anticipated common annual progress price over the subsequent 5 years at 4%. Our anticipated annual dividend progress price stays at 2.5%.

The corporate will possible enhance its payout ratio earlier than its new tasks begin producing sufficient money flows to re-accelerate dividend progress. The inventory’s historic 10-year common annual dividend progress price of 4.0% is ample to compensate for the forex fluctuations, progressively rising traders’ revenue.

Aggressive Benefits & Recession Efficiency

The corporate’s aggressive benefit lies within the moat surrounding regulated utilities. With no straightforward entry into the sector, regulated utilities take pleasure in an oligopolistic market with little competitors risk. The corporate’s resilience has been confirmed decade after decade.

One other aggressive benefit is the corporate’s sturdy monetary place. Canadian Utilities has investment-grade credit score scores of BBB+ from Normal & Poor’s and A- from Fitch. This permits the corporate to lift capital at engaging rates of interest.

The corporate additionally has a powerful steadiness sheet with a well-laddered debt maturity profile, which can assist maintain the dividend sustainable, even when rates of interest proceed to rise.

Supply: Investor Presentation

Regardless of a number of recessions and unsure environments over the previous 50 years, the corporate has withstood each considered one of them whereas elevating its dividend. Whereas Canadian Utilities’ payout ratio got here beneath strain throughout 2020 (although dividends had been in actuality coated from its working money flows if we’re to exclude depreciation and amortization,) by 2028, we count on it to have returned to way more comfy ranges of round 76% of its internet revenue.

The corporate held up extraordinarily nicely throughout earlier recessions and financial downturns, such because the coronavirus pandemic. We might count on Canadian Utilities to carry out comparatively nicely in future recessions, provided that the corporate operates in a nearly recession-proof business.

Valuation & Anticipated Returns

Utilizing the present share value of ~$21 and anticipated earnings-per-share of US$1.66 for the operating fiscal 12 months, Canadian Utilities is buying and selling at a price-to-earnings ratio of 12.7. Our truthful earnings a number of for Canadian Utilities is 16.0.

Subsequently, the inventory appears to be undervalued at its present value degree. If the inventory trades at our assumed truthful valuation degree in 2028, it’ll take pleasure in a 4.8% annualized valuation tailwind over the subsequent 5 years.

Except for adjustments within the price-to-earnings a number of, future returns will probably be pushed by earnings progress and dividends.

We count on 4% annual earnings progress over the subsequent 5 years, as utilities are typically slow-growth companies. As well as, Canadian Utilities at the moment pays a quarterly dividend of CAD $0.4486 per share. This works out to roughly CAD $1.79 per share on an annualized foundation. At present trade charges, this interprets to an annualized dividend of $1.35 per share in U.S. {dollars} for a 6.4% dividend yield.

Whole returns may include the next:

0% earnings progress
4.8% a number of growth
6.4% dividend yield

Given all of the above, Canadian Utilities is predicted to supply a mean annual complete return of 13.5% over the subsequent 5 tears. Consequently, we’ve a purchase suggestion on the inventory and stay assured within the firm’s potential to lift dividends by way of a recessionary surroundings.

Ultimate Ideas

Canadian Utilities has a protracted progress report and a optimistic future outlook. We at the moment discover the inventory undervalued. Consequently, shares might supply a 13.5% common annual complete return over the subsequent 5 years.

The inventory ought to proceed to lift its dividend for a lot of extra years, because the enterprise is prone to maintain up nicely throughout recessions. Canadian Utilities additionally has a excessive yield of above 6%, which is engaging to risk-averse revenue traders, reminiscent of retirees. Subsequently, shares earn a purchase score.

Moreover, the next Positive Dividend databases comprise probably the most dependable dividend growers in our funding universe: