Alberta-based Canadian Utilities (TSE: CU) (CDUAF) is a diversified multinational energy infrastructure corporation providing solutions in Electricity, Pipelines & Liquid, and Retail Energy.
By delivering natural gas and electricity to neighborhoods all across Alberta and Northern Canada, keeping the lights on in Mexico powered by green hydroelectricity, evolving the electricity system in Puerto Rico, or designing highly efficient natural gas-powered power plants across Australia, the scope and scale of Canadian Utilities’ businesses are indeed global.
What truly distinguishes Canadian Utilities not only among its industry peers but the rest of Canada’s listed companies, in general, is that it boasts the longest track record of consecutive dividend increases in the country. Specifically, Canadian Utilities has increased its annual dividend every year for the past 50 years, without exception.
Through multiple recessions, several periods of unfavorable economic environments, and, most recently, a pandemic, Canadian Utilities’s operations have continued producing resilient results.
Shares of regulated utilities tend to offer minimal returns from a capital gains standpoint, with their dividends usually comprising the majority of investors’ total returns potential. This is the case with Canadian Utilities as well. Despite its continuously robust dividend increases, the stock is currently trading at practically the same levels it did back in 2013.
However, precisely due to the performance of such companies being exceptionally resilient, they suffer substantially less during times of increased uncertainty. For instance, the ongoing trading environment, which includes elevated inflation levels, geopolitical turmoil, and significant macroeconomic concerns, has scared investors leading to massive losses in equities.
Yet, shares of Canadian Utilities have risen by more than 10% over the past year, as investors have flocked to the company’s highly predictable cash flows and reliable investment case.
On the one hand, Canadian utilities’ performance should remain solid for years to come, and the stock is likely to sufficiently meet the needs of income-oriented investors.
On the other hand, the pace of dividend growth is likely to remain softened going forward amid a relatively elevated payout ratio. Shares are not particularly cheap as well. For this reason, I am neutral on the stock.
Recent Performance
Canadian Utilities’ performance came in quite vigorous for the first three months of Fiscal 2022. I have converted all numbers from Canadian Dollars to U.S. Dollars moving forward, unless otherwise noted, for your convenience.
For Q1, revenues and EPS totaled $860 million and $0.61 per share, suggesting an increase of 22.3% and 41.0%, respectively, in constant currency.
The increase in revenues was mainly the result of rate relief provided to customers last year amid the COVID-19 pandemic. During and subsequent to the quarter, the company focused on collecting these deferred revenues, which it had neglected last year, in order to help its customers navigate the challenging environment at the time.
The growth in EPS was primarily the result of the timing of operating costs in the Natural Gas Distribution business as well as increased learnings from the company’s International Electricity Operations. The ongoing highly-inflationary environment positively impacted Canadian Utilities, as earnings in the International Natural Gas Distribution business improved as well.
Based on the company’s Q1 results and quite predictable operating performance, my model points towards Fiscal 2022 EPS of close to $1.80. This comes quite close to consensus estimates, which point towards Fiscal 2022 EPS of C$2.29, which converts to $1.79 at the current CAD/USD rate.
Is the Dividend Worth It?
Canadian Utilities’ current annualized dividend rate of C$1.7768 converts close to US$1.39 at the current CAD/USD rate. With shares trading at US$31.31, the stock currently yields close to 4.4%. This is slightly lower than the stock’s historical average amid its recent rally. Yet, it remains at rather substantial levels, relatively speaking.
The 10-year dividend per share CAGR stands at around 5.6%, which is a rather satisfactory dividend hike rate for a utility company. However, note that payouts in USD include FX effects, which somewhat influence this number – not by a substantial margin, nonetheless.
In any case, I believe that Canadian Utilities’ dividend growth prospects are set to remain subtle moving forward due to the payout ratio reaching elevated levels.
At the current dividend per share annualized run rate and projected EPS for the year, the payout ratio stands at 77%, and that includes boosted results following last year’s revenue deferrals. In fact, softening dividend growth prospects is already appearing to be the case, with both of the company’s two latest hikes being by just 1% each.
Wall Street’s Take
Turning to Wall Street, Canadian Utilities has a Hold consensus rating based on five unanimous Holds assigned in the past three months. At $30.87, the average Canadian Utilities price target implies 1.4% downside potential.
Takeaway
Canadian Utilities is a reliable company for income-oriented investors, with the company boasting half a century of uninterrupted annual dividend increases. However, the pace of dividend growth is likely to remain weak until the company’s earnings reach a higher plateau, most likely.
Further, following the stock’s recent rally, the stock’s forward P/E stands at 17.3 based on my EPS forecast and consensus estimates. I find this multiple quite rich, considering the company’s growth (being a regulated utility) has historically not exceeded the single-digits.
Investors are likely to continue paying a premium for the stock due to its tested qualities and robust dividend in the current uncertain environment, nonetheless.
