Canadian Utilities (TSE:CU) Dividend & Stock Analysis

I don’t think I’m letting the cat out of the bag by any stretch of the imagination when I suggest that investors looking for Canadian dividend stocks look for high dividend yields, dividend growth, and dividend stability.

However, one of the key things investors tend to forget is that we also need returns via an increase in stock price. So, does Canadian Utilities (TSX:CU) provide not only a strong dividend, but strong growth potential?

In this article we’re going to find out. I’m going to do a deep dive into Canadian Utilities, which holds the title of the stock with the longest dividend growth streak in Canada.

Lets look at the health of its dividend and the overall opportunity for Canadian investors looking to buy stocks for their dividend portfolio.

 

Canadian Utilities (TSE:CU) dividend and stock analysis

First off, lets dig into what Canadian Utilities does, and what regions they provide services to. Typically I find this is something investors fail to do with a company like Canadian Utilities, as they look at the dividend along with the dividend growth streak and simply purchase the company.

Although there is no doubt Canadian Utilities is a strong Canadian blue chip stock, it is important to look at as many aspects of the business as possible. The company has a high amount of exposure to a particular province that is expected to struggle moving forward, Alberta. More on that later.

Canadian Utilities is a subsidiary of its major holding company Atco (TSE:ACO.X). The company has 3 primary divisions: electricity, pipelines & liquid, and retail energy. The company has over $20 billion in assets and has the capacity to generate nearly 250 megawatts of power.

The company primarily operates in Canada but does have exposure to the United States and surprisingly, Australia.

The company generates 95% of its earnings from regulated utilities. This essentially means the company owns the poles, the meter, the generation methods, and everything else in between. The company discusses rates with municipalities that guarantee profit for the company, with reasonable rates for the consumer, and they supply the power.

Now, this isn’t as high as Fortis (TSE:FTS), which generates 99% of its earnings through regulated utilities. 95% is still a high enough number that makes cash flows and in turn the dividend, particularly reliable. Speaking of dividend, lets have a look at how secure it really is.

 

Canadian Utilities dividend analysis

So, lets kick this off with some things you likely already know. Canadian Utilities is the poster-boy in Canada when it comes to dividend growth. The company has a dividend growth streak of 48 years and is more than likely going to become the first Canadian company to hit Dividend King status, which down in the United States is 50 consecutive years or more of dividend growth.

In mentioning that, it is critical that we don’t get blinded by the fact the company has raised dividends consistently for this long. After all, a company with a $5 annual dividend could raise its dividend by one penny every year for 50 years and sit at $5.50, achieving Dividend King status, with 10% dividend growth over those 5 decades. Optimal investment in terms of dividend growth? Absolutely not.

Fortunately, Canadian Utilities is not in this situation. The company has raised dividends by 9.58% annually over the last 5 years, which ranks it third amongst major utility companies here in Canada. The fastest growing dividend in the utility sector belongs to Canadian Utilities big brother, Atco.

Canadian Utilities most recent dividend increase came in well below its 5 year average at 7.48%. However, this was to be expected as prior to COVID-19, we were in a rising interest rate environment. Even major companies like Atco, Fortis, and Brookfield Renewables failed to match 5 year averages with recent increases.

The company’s payout ratio sits at 77% of earnings, 78% of free cash flows, and 35% of operating cash flows. Historically, Canadian Utilities has maintained its dividend with these payout ratios, so in my opinion, the dividend is relatively safe.

Yielding 5.33%, the company is one of the highest yielding major stocks in the sector, second to only Capital Power (TSE:CPX).

Although the high yield should be a positive, for prospective investors it should be cause for concern. Why? Well, take a look at the chart below:

Despite a short period in late 2018 when the TSX underwent a significant correction, Canadian Utilities dividend yield hasn’t been this high in a very long time. This 5 year chart highlights the fact that the company’s yield has been on a steady uptrend over the last half decade.

So, a rising yield is good right? No, it’s not. It means the company’s share price is slowly decreasing, which is what I’ll get to next.

 

Canadian Utilities decreasing share price and valuation

Market Cap: $8.93 billion
Forward P/E: 16.51
Yield: 5.33%
Dividend Growth Streak: 48 years
Payout Ratio (Earnings): 75.39%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 7.48%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

 

Remember the start of the article when I referred to the fact we need to make sure our dividend stocks share price isn’t flat or achieving low growth? Canadian Utilities takes it to the next level, as the company’s share price has been decreasing at a rapid pace.

Over the past 5 years, Canadian Utilities has a compound annual growth rate of -2.33%. This means on average, the company’s share price is shrinking by 2.33% each year. Combine this with a 5.33% dividend, and you’re essentially purchasing a utility company that has barely kept up with inflation.

Not to mention, those who purchased Canadian Utilities prior to COVID-19 were not getting this high of a yield, so they’re more than likely worse off.

Now, it’s easy to isolate one company from the bunch. How have utilities performed as a whole? Has Canadian Utilities been the lone wolf in terms of underperformance or is the whole sector struggling? Unfortunately, it’s pretty much just been them.

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As you can see, there’s two companies that stand out on this chart in terms of dividend adjusted returns over the last half decade, and not in a good way. Both of them are very closely intertwined as I’ve mentioned previously, Atco, and Canadian Utilities.

All of these companies have outperformed Canadian Utilities in terms of dividend adjusted returns, and they offer reliable dividends to boot.

Despite this, the company continues to trade at a premium relative to the sector in terms of price to sales and price to book.

 

Overall, there is better opportunities in the utility sector

It’s pretty clear from the overall returns of the utility companies I listed in the chart above, that Canadian Utilities has a lot of catching up to do.

The company took a nosedive during COVID-19, much like all other utility companies.

However Canadian Utilities exposure to Alberta, which is expected to suffer significant economic downfalls from COVID-19, caused it to lag by a wide margin in terms of recovery. At the time of writing, the company is still down 20.5% since COVID-19 hit, while the TSX Index is down just 8.5% and a comparable utility player in Fortis is down just 5.5%.

A 48 year dividend growth streak is nice, and a 5.33% yield is nothing to scoff at either. However, combine its yield with a shrinking share price and an investment in Canadian Utilities over the last 5 years has done nothing but shrink the buying power of your capital.

Does it have room to run after its share price shrank due to COVID-19? Possibly. But my attitude towards Canadian Utilities is similar to that of Canadian Western Bank. Even though I’m a born and raised Albertan, I don’t want to be exposed to companies with a high reliability on the province.

Don’t get caught up in the fact it’s almost a Dividend King. If you’re looking to buy stocks in the utility sector, there are better plays.

For me, this company is a hard pass.