Canadian Utilities Limited: Is it a Good Investment Today?

Are Canadian Utilities Limited’s (TSX:CU) 2015 earnings results as bad as they seem, or is the utility with 44 years of dividend growth a good investment today?

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The Motley Fool

Canadian Utilities Limited (TSX:CU) reported earnings on February 25. Shares fell 3.1% on the day. Its 2015 adjusted earnings were 16% lower than 2014’s. On a per-share basis, they were 17% lower. Additionally, Canadian Utilities’s revenues declined by 9.3% year over year. Yet the utility is the top company in Canada with the longest dividend-growth streak.

Strong dividend-growth record

Canadian Utilities should peak the interests of dividend investors because it has a track record of increasing its dividend for 44 years. Its recent dividend-per-share growth was decent.

From 2013 to present, it has increased its dividend from an annual payout of $0.97 to $1.30 per share, an income growth of 34% (or an average growth rate of 10.3% per year) for shareholders who bought in 2013.

However, its payout ratio is about 72% and historically high for the company. Unless earnings bounce back, shareholders should be concerned about its future growth potential.

The business

ATCO owns 53% of Canadian Utilities. Canadian Utilities has assets of about $18 billion. Its business operations include the following:

  • Electricity: power generation, distributed generation, and electricity distribution, transmission and infrastructure development.
  • Pipelines and liquids: natural gas transmission, distribution and infrastructure development, natural gas liquids storage and processing, and industrial water solutions.
  • Retail energy: electricity and natural gas retail sales.

In 2015, 63% of its adjusted earnings came from its electricity operations (48% regulated and 15% non-regulated) and 37% came from its pipelines and liquids operations (34% regulated and 3% non-regulated).

Year over year, Canadian Utilities’s electricity segment and pipelines and liquids segment experienced declined adjusted earnings of 12.7% and 3.6%, respectively. These declines were partly because of multiple regulatory decisions made by the company.

Excluding the regulatory decisions, the electricity segment would have experienced 4.6% adjusted earnings growth due to continued rate-base growth, and the pipelines and liquids segment would have experienced 18.4% growth due to continued rate-base growth and cost-reduction savings.

Between 2016 and 2018, Canadian Utilities anticipates capital growth projects of $1.5-2 billion each year, totaling ~$5.3 billion worth of projects. These should help Canadian Utilities drive growth.

Conclusion

After the price dip to $33.60, Canadian Utilities yields 3.9%. If you buy $5,000 worth of shares, you can expect to receive about $195 in eligible annual dividends. This income is more favourably taxed than your job’s income or interest income in a non-registered account.

Canadian Utilities’s dividend is safe for now. However, it can only continue growing at a 10% rate if its earnings start growing again. Interested investors should watch for earnings and revenue improvements before considering a position.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of ATCO LTD., CL.I, NV and CANADIAN UTILITIES LTD., CL.A, NV.

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