Dividend investors love Fortis Inc. (TSX:FTS).
There are many legitimate reasons for these feelings, of course. Perhaps the biggest is Fortis’s impressive dividend streak. The company has hiked its annual dividend each year since becoming publicly traded back in 1973. That 42 years of consecutive dividend increases is the best streak in Canada.
Fortis is the largest power producer in the country with a market cap close to $13 billion. It continues to grow, recently announcing it would acquire ITC, a U.S.-based electricity generator, for US$11.3 billion. The company also has substantial natural gas assets. Altogether, this translates into 3.2 million customers.
There are just a couple of problems with Fortis. The first is valuation. According to analyst projections, the company can be expected to earn $2.13 per share in 2016 and $2.42 per share in 2017. Even using the more generous 2017 estimates, shares are still trading at more than 18 times earnings. That’s a tad expensive, at least compared with peers.
The other reason of concern is the company’s balance sheet. It continues to aggressively borrow when rates are low, which has led to a lot of debt accumulation. At the end of 2012, including preferred shares, Fortis had some $7.5 billion in debt. These days, that number is closer to $13.7 billion.
Additionally, Fortis shares have been bid up by investors looking for consistent yield. Shares are up 25% over the last year with the yield dropping to 3.4%.
Instead of Fortis, investors should check out these three utilities that offer far better value.
Capital Power
Capital Power Corp. (TSX:CPX) gives investors the unique opportunity to get a 7.4% yield that’s easily covered by cash flow.
There’s a catch, however. The company’s assets are mostly coal-fired power plants in the province of Alberta. That province recently made headlines for pledging to eliminate all coal power plants by 2030.
Here’s what will happen.
When Capital Power built these plants, they were approved for 50 years. Because a new government is changing the rules, Capital Power will be entitled to a payout come 2030. The company is pushing for book value of its assets then, which is a reasonable request.
Shares today are trading at approximately 30% under book value, which doesn’t make sense. These plants will generate income for more than a decade before being shut down. And Capital Power has a solid balance sheet, so the situation isn’t dire there either.
Shares trade at less than six times trailing free cash flow, making the company one of Canada’s cheapest on a price-to-free cash flow metric. It easily earns enough to cover the 7.4% yield.
TransAlta Renewables
TransAlta Renewables Inc. (TSX:RNW) is one of Canada’s largest green-energy producers with 40 different operating facilities in Canada, the U.S., and Australia. Australia is the company’s newest prize; Renewables acquired the South Hedland project in the nation from its parent, TransAlta Corporation. South Hedland will be completed sometime in mid to late 2017.
Renewables will likely have plenty of other acquisition opportunities from its parent. TransAlta is desperate to pay down its debt, and it has plenty of hydro and renewable energy assets it can drop down to its subsidiary.
The company pays a terrific dividend yield of 6.5%. It’s a sustainable payout too, with projected funds from operations to come in at approximately $300 million in 2016 with dividends in the neighborhood of $200 million.
Brookfield Renewable
Brookfield Renewable Partners LP (TSX:BEP.UN)(NYSE:BEP) owns renewable power assets all over the world. Its mainly hydro portfolio, located in Canada, the U.S., Colombia, Brazil, and Europe, has generating capacity of more than 10,000 MW.
The company is a proven acquirer, buying more than 6,500 MW in assets over the last decade. And management has made it a mandate to operate only in areas where power prices are regulated–a move which ensures more consistent cash flows.
Brookfield Renewable shares currently yield 5.8%–an attractive payout in today’s environment. The dividend is sustainable too, with a payout ratio of approximately 70%.
Fortis is a great company. But for investors who want a better yield, I’d take a closer look at Capital Power, TransAlta Renewables, or Brookfield Renewable Partners.
