Canadian Utilities Stock: Buy, Sell, or Hold?

Canadian Utilities (TSX:CU) stock has struggled in the current rate climate, but timing may be right for this undervalued Dividend King.

Canadian Utilities (TSX: CU) is a Calgary-based company that is engaged in the electricity, natural gas, and retail energy businesses in the United States, Australia, and around the world. Today, I want to explore what makes this top utility stock stand out compared to its peers on the S&P/TSX Composite Index. Let’s jump in.

How has Canadian Utilities stock performed over the past two years?

Canadian Utilities stock has increased 0.83% month over month as of close on Wednesday, January 17, 2024. Shares of this top utility stock have plunged 16% year over year at the time of this writing. Utility stocks have been throttled in an environment that has seen the most aggressive interest rate-tightening policy since the beginning of the 2000s. Why have utility stocks struggled?

Should Canadians seek exposure to the utility space right now?

Utility stocks like Canadian Utilities, Fortis, Hydro One, and Emera all performed well over the course of the 2010s. The Great Recession of 2007-2009 spurred the U.S. Federal Reserve and the Bank of Canada (BoC) to drop interest rates to historic lows. Moreover, the U.S. pursued multiple rounds of quantitative easing, a multi-trillion-dollar asset purchasing program that helped significantly prop up valuations in the U.S. stock market.

Meanwhile, utility stocks benefited in this climate as a low-risk alternative for conservative investors. Fixed-income vehicles saw their rate of return plunge to historic lows. Indeed, products like Guaranteed Investment Certificates (GICs), long a darling among the traditional Canadian investor, offered deeply unimpressive savings rates. Utility stocks, however, offered the stability of a blue-chip stock that allowed investors exposure to essential services. These equities also offered superior dividend yields compared to fixed-income vehicles like GICs.

Among utility stocks, Canadian Utilities stock stands in a class of its own.

Canadian Utilities earnings in 2023: A breakdown

Investors can expect to see Canadian Utilities’s fourth-quarter (Q4) and full-year fiscal 2023 earnings in late February or early March. In the third quarter of fiscal 2023, the company delivered adjusted earnings of $87 million — down from $120 million in the previous year. Moreover, adjusted earnings for the first three quarters of fiscal 2023 were reported at $404 million — down from $475 million in the year-to-date period in fiscal 2022.

Canadian Utilities also reported unrealized gains (losses) on mark-to-market forward and swap commodity contracts of $70 million in Q3 2023 — up from an unrealized loss of $17 million in the previous year. In the year-to-date period, Canadian Utilities posted unrealized gains of $138 million compared to a loss of $48 million for the same timespan in the prior year.

Bottom line

We have covered Canadian Utilities’s stock performance, the broader utility space, and its recent earnings, but it has one specific quality that makes it stand taller than any other Canadian stock. Canadian Utilities stock was the very first Dividend King on the Toronto Stock Exchange.

A Dividend King is a stock that has delivered at least 50 consecutive years of dividend growth. In the U.S., some of the most well-known Dividend Kings include Coca-Cola, 3M Company, and Walmart. Canadian Utilities has now hiked its quarterly dividend payout for 51 straight years as of January 2024. This stock currently offers a quarterly dividend of $0.453 per share. That represents a strong 5.7% yield.

Shares of Canadian Utilities stock also possess a favourable price-to-earnings ratio of 14. That puts this stock in very favourable value territory compared to its industry peers. The BoC has signalled that it will pursue several interest rate cuts in 2024. That is a bullish sign for utility stocks. Now could present an opportunity to add Canada’s first Dividend King at great value.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool recommends Emera, Fortis, and Walmart. The Motley Fool has a disclosure policy.

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