Where Will Canadian Utilities Stock Be in 5 Years?

Canadian Utilities (TSX:CSU) is a classic example of a stock where the dividend is all you get. Can the company turn things around?

| More on:

Image source: Getty Images.

Canadian Utilities (TSX:CU) stock is well known for its high dividend yield. At 5.89%, it’s nearly double the yield on a a typical TSX index fund. However, CU stock has delivered almost no capital appreciation in recent years – in a full decade in fact. The stock’s most recent move upward that really “stuck” was in 2012. Since then, it has been volatile and ultimately flat long term. In this article, I will explore the factors behind CU’s sluggish performance, and attempt to gauge whether its performance can improve in the future.

Slow growth

One of the factors behind CU’s sluggish stock performance over the years has been slow earnings growth. Over the last five years, it grew at the following compounded annual (CAGR) rates:

  • Revenue: -2.9%.
  • Net income: 6.8%.
  • Diluted earnings per share (EPS): 7.4%.

The top line growth was negative, although the growth in earnings was actually OK for a utility. Over a 10-year timeframe, the situation reverses:

  • Revenue: 1.74%.
  • Net income: 0.86%.
  • Diluted EPS: -0.18%.

There was basically no growth over a 10-year period, hence the lack of movement in the stock. Were there any signs that the situation might improve in the most recent quarterly report? Truthfully, it was a mixed showing as well, featuring metrics like:

  • $812 million in revenue, down 9.6%.
  • $0.39 in earnings per share, up 21.8%.
  • $0.32 in adjusted earnings per share, down 28%.
  • $394 million in cash from operations, up 3.7%.

Profitability

One factor that Canadian Utilities has going in its favour is profitability. In the most recent 12-month period, its profitability ratios were:

  • Gross profit margin: 67%.
  • EBIT margin: 30%.
  • Net margin: 17%.
  • Return on equity: 11.3%.

These ratios suggest that CU is a very profitable company. As for whether it will continue to be profitable, I’d say the odds are pretty good. As a utility, it enjoys regular recurring revenue on long term contracts. It does have expenses to manage, but so far it seems to be doing a good job of managing them. There is one expense category that could become problematic. I’ll review that in the next section.

Debt

Debt – or rather, the interest on debt – is an expense category that could become problematic for Canadian utilities. The company has $9.7 billion worth of debt, which is about $4.7 billion more than it has in shareholders’ equity. The amount of debt has grown steadily over the last 10 years, a period in which earnings haven’t really grown. Thanks to the Bank of Canada’s interest rate hikes, the interest on CU’s debt is rising. In the last 12 months, Canadian Utilities had $448 million in interest expenses, up from $417 million in 2022. Rate hikes and debt growth are making their presence felt. On the other hand, despite these rising costs, CU is still paying out less than 100% of its earnings as dividends, so the payout is fairly safe.

The five-year forecast

Taking everything into account, I’d expect Canadian Utilities’ next five years to look like its previous five: steady and modestly growing dividends, but no capital appreciation. The company does not have many growth drivers and its interest costs are rising. This all makes for a high yield play where the dividend is all you’re likely to get.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Payday ringed on a calendar
Dividend Stocks

These 2 TSX Dividend Machines Pay You Monthly

Here are two of the best monthly dividend stocks you can buy in Canada right now and hold for the…

Read more »

Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

This dividend stock has a solid present, and a strong future for investors looking to gain monthly passive income while…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Dividend Stocks

How to Earn at Least $1,560 in Passive Income in 2024 With Less Than $40K in Savings

If you have $40,000 sitting around, here is exactly how you can put it away and gain at least $1,560…

Read more »

Payday ringed on a calendar
Dividend Stocks

1 Under-$50 Dividend Stock to Buy for Monthly Passive Income

A dividend stock under $50 is the best option for those investing for monthly passive income.

Read more »

Target. Stand out from the crowd
Dividend Stocks

3 No-Brainer Stocks to Buy Right Now for Less Than $10

These three dividend stocks are no-brainer buys right now, especially since it won't take much cash at all to buy…

Read more »

A meter measures energy use.
Dividend Stocks

Forget Air Canada: Buy This Magnificent Utilities Stock Instead

A Dividend Aristocrat in the utility sector is a better buy than Air Canada.

Read more »

Increasing yield
Dividend Stocks

Is BCE Stock the Best High-Yield Dividend Stock for You?

While it might now double your money in the short term, BCE stock can help you generate reliable passive income…

Read more »

Canadian Dollars
Dividend Stocks

1 Passive-Income Stream and 1 Dividend Stock for $14,727 in 2024

Passive income should be passive, bringing in the easiest cash possible. And with AI in use along with a dividend…

Read more »