Updated on October 29th, 2024 by Aristofanis Papadatos
The Dividend Kings are a group of just 53 stocks that have increased their dividends for at least 50 years in a row. We believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.
With this in mind, we created a full list of all the Dividend Kings.
You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:
Each year, we individually review all the Dividend Kings. The next in the series is Canadian Utilities (CDUAF).
Canadian Utilities has raised its dividend for 52 consecutive years, which makes it the only Canadian company on the list of Dividend Kings. This article will analyze the company in greater detail.
Business Overview
Canadian Utilities is a utility stock with approximately 5,000 employees. ATCO owns 53% of Canadian Utilities. Based in Alberta, Canadian Utilities is a diversified global energy infrastructure corporation that delivers solutions in electricity, pipelines & liquid, and retail energy.
The company has a long history of generating steady growth and consistent profits through the economic cycle.
Source: Investor Presentation
On August 2nd, 2024, Canadian Utilities posted its Q2 results for the period ending June 30th, 2024. For the quarter, revenues amounted to $628.6 million, 2% lower year-over-year (in constant currency), while adjusted earnings per share came in at $0.31, about 16% higher year-over-year.
The decrease in revenues resulted from lower commodity prices in ATCO Energy, lower natural gas storage revenues, reduced pricing in ATCO EnPower, and lower electricity distribution revenues. This was partially offset by rate base growth and increased return on equity in ATCO Energy Systems.
The substantial increase in earnings resulted from rate base growth, increased return on equity in ATCO Energy Systems, stronger seasonal spreads in natural gas storage at ATCO EnPower, and higher interest income on corporate investments. These gains were partly offset by inflation indexing in ATCO Australia and lower pricing in ATCO EnPower.
Canadian Utilities expects to invest C$1.2 billion in capital projects this year. Approximately 58% of this amount has been allocated on electricity distribution and transmission while the remaining 42% has been allocated on natural gas distribution and transmission.
Growth Prospects
By benefiting from a stable business model, Canadian Utilities can slowly but progressively grow its earnings. The company consistently invests appreciable amounts in new projects and benefits from base rate increases, which tend to hover between 3% and 4% per year.
As growth in the regulated utilities space remains rather limited, Canadian Utilities is now seeking to expand its business through the strategic acquisition of renewable generation assets.
The $730 million investment should provide the company with immediate scale and future growth through the development pipeline and enjoy the qualities of long-term purchase power agreements that are common in wind projects.
Combining the company’s growth projects and the potential for modest margin improvements, we maintain our expected average annual growth rate over the next five years at 4%. Our expected annual dividend growth rate remains at 2.5%.
The company will likely improve its payout ratio before its new projects start producing enough cash flows to re-accelerate dividend growth. The stock’s historical 10-year average annual dividend growth rate of 4.4% is sufficient to compensate for the currency fluctuations, progressively growing investors’ income.
Competitive Advantages & Recession Performance
The company’s competitive advantage lies in the moat surrounding regulated utilities. With no easy entry into the sector, regulated utilities enjoy an oligopolistic market with little competition threat. The company’s resilience has been proven decade after decade.
Another competitive advantage is the company’s strong financial position. Canadian Utilities has investment-grade credit ratings of BBB+ from Standard & Poor’s and A- from Fitch. This allows the company to raise capital at attractive interest rates.
The company also has a strong balance sheet with a well-laddered debt maturity profile, which will help keep the dividend sustainable, even if interest rates remain elevated.
Source: Investor Presentation
Despite multiple recessions and uncertain environments over the past 50 years, the company has withstood every one of them while raising its dividend.
While Canadian Utilities’ payout ratio came under pressure during 2020 (though dividends were in reality covered from its operating cash flows if we are to exclude depreciation and amortization), by 2029, we expect it to have returned to much more comfortable levels of around 74% of its net income.
The company held up extremely well during previous recessions and economic downturns, such as the coronavirus pandemic.
We would expect Canadian Utilities to perform relatively well in future recessions, given that the company operates in a virtually recession-proof industry.
Valuation & Expected Returns
Using the current share price of ~$26 and expected earnings-per-share of US$1.68 for the running fiscal year, Canadian Utilities is trading at a price-to-earnings ratio of 15.5. Our fair earnings multiple for Canadian Utilities is 13.0.
Therefore, the stock seems to be overvalued at its current price level. If the stock trades at our assumed fair valuation level in 2029, it will incur a -3.4% annualized valuation headwind over the next five years.
Aside from changes in the price-to-earnings multiple, future returns will be driven by earnings growth and dividends.
We expect 4% annual earnings growth over the next five years, as utilities are generally slow-growth businesses. In addition, Canadian Utilities currently pays a quarterly dividend of CAD $0.4531 per share.
This works out to roughly CAD $1.81 per share on an annualized basis. At current exchange rates, this translates to an annualized dividend of $1.33 per share in U.S. dollars for a 5.1% dividend yield.
Total returns could consist of the following:
- 0% earnings growth
- -3.4% multiple contraction
- 1% dividend yield
Given all the above, Canadian Utilities is expected to offer an average annual total return of 5.3% over the next five tears.
As a result, we have a hold recommendation on the stock while we also remain confident in the company’s ability to raise dividends through a recessionary environment.
Final Thoughts
Canadian Utilities has a long growth record and a positive future outlook. However, we currently find the stock somewhat overvalued. As a result, shares may offer a 5.3% average annual total return over the next five years.
The stock should continue to raise its dividend for many more years, as the business is likely to hold up well during recessions.
Canadian Utilities also has an above average yield of 5.1%, which is attractive to risk-averse income investors, such as retirees.
Nevertheless, due to the somewhat rich valuation of the stock, we recommend waiting for a lower entry point before opening a position.
Additional Reading
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Aristocrats List: S&P 500 Index stocks with 25+ years of dividend increases.
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.