Steady cash flow should let this stock keep raising its dividend, which currently yields 5.0%.
This power generation firm stands to benefit from new projects and rate-regulated long-term contracts. The bulk of the $4.5 billion earmarked for future projects is aimed at regulated businesses. The shares trade at a very reasonable 13.2 times projected earnings.
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CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] and CU.X [class B voting]; www.canadianutilities.com) distributes electricity and natural gas in Alberta and Australia. It also owns or invests in 18 power plants—15 in Canada, 2 in Australia and 1 in Mexico. ATCO Ltd. owns 52.5% of the company.
In December 2017, Canadian Utilities transferred its 24.5% stake in ATCO Structures & Logistics to the parent company. As a result, ATCO will own 100% of that business, which makes temporary buildings for construction, mining and energy exploration firms.
Under the deal, Canadian Utilities received $140 million for its stake.
If you exclude that sale and other unusual items, the company’s earnings in the first quarter of 2018 fell 15.0%, to $181 million, or $0.67 a share. A year earlier, it earned $213 million, or $0.79. The decline is mainly due to lower regulated power and gas rates in Alberta.
However, revenue in the quarter gained 37.8%, to $1.4 billion from $1.0 billion. The increase is mainly because the Alberta Electric system hired Canadian Utilities to build and operate a new 500-km power transmission line between Edmonton and Fort McMurray. The project will begin operating in 2019.
Dividend Stocks: Bulk of investment in new projects aimed at regulated businesses
Including the Fort McMurray line, Canadian Utilities plans to invest $4.5 billion in new projects between 2018 and 2020. Of that total, $3.5 billion will go toward its regulated businesses. It will also spend $1.0 billion on new facilities backed by long-term contracts.
Among those plants is a hydroelectric power station in Veracruz, Mexico, that the company acquired in February 2018 for $114 million.
The company must also close down its two coal-fired plants (Sheerness and Battle River) in Alberta by 2030. They supply about 59% of its power in that province.
However, Canadian Utilities now plans to redevelop those plants to burn natural gas instead of coal. It expects to complete the projects by 2020. As well, the Alberta government will help offset some of those costs.
The company also recently teamed up with Ranman Energy to build a 26 megawatt co-generation power plant near Durango, Mexico.
The partners will build that gas-fired plant on the site of a chemical facility operated by Chemours Company (New York symbol CC). It will sell its power to Chemours under a long-term contract. As well, the new plant will consume excess gas and re-use steam generated as by-products of the chemical facility.
Canadian Utilities’ share of the project’s cost is $70 million. That’s equal to 12% of the $602 million, or $2.23 a share, the company earned in 2017. The new plant should begin operating in the second quarter of 2019.
Starting with the March 2018 payment, Canadian Utilities increased its quarterly dividend by 10.0%, to $0.3933 a share from $0.3575. The new annual rate of $1.57 yields a high 5.0%. The company has increased the payout each year since 1972.
Canadian Utilities’ new operations will probably increase the company’s 2018 earnings by about 6% to $2.36 a share. The stock trades at 13.2 times that forecast.
The class A non-voting shares are more liquid than the class B voting shares.
Recommendation in TSI Dividend Advisor: Canadian Utilities A stock is a buy.
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CU dropped from 40 to about 31 in the last year. I’d wait for the price to stabilize a bit before buying.