The Dividend Kings are a group of just 45 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.

Each year, we individually review all the Dividend Kings. The next in the series is Canadian Utilities (CDUAF).

Canadian Utilities has increased its dividend for 50 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 delivering solutions in Electricity, Pipelines & Liquid, and Retail Energy.

The company has a long history of generated steady growth and consistent profits through the economic cycle.

Source: Investor Presentation

On July 28th, the company reported second-quarter financial results. Canadian Utilities reported second quarter 2022 adjusted earnings of CAD$0.51 per share, up 18.6% from the second quarter of 2021. This was a strong quarter of growth for the company, driven by higher rates and customer additions.

During the quarter, CDUAF also invested C$294 million in capital projects. Of this, approximately 83% was for its regulated utilities business, with the remaining 17% invested in its energy infrastructure business.

Growth Prospects

By benefiting from a stable business model, Canadian Utilities can slowly but progressively grow its earnings. The company consistently invests in new projects and benefits from the base rate increases, which grow at around 3% to 4% annually.

Last year, management had filed an application with the Alberta Utilities Commission to postpone Canadian Utilities’ electricity and natural gas distribution rate increases. The company expects to receive the deferred revenues in early 2022.

Combining the company’s growth projects, the potential for modest margin improvements, and –as voluntarily pursued, – the postponed rate base increases, we retain our expected growth rate at 4%. Our DPS CAGR estimate 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 impressive 10-year dividend CAGR of 9.6% is more than enough to compensate for the FX fluctuations, progressively growing investors’ income.

Competitive Advantages & Recession Performance

The company’s competitive advantage lies in the moat regulated utilizes are surrounded by. With no easy entry in the sector, regulated utilities enjoy an oligopolistic market with little competition threat. The company’s resiliency has been proven for decade after decade.

Another competitive advantage is the company’s strong financial position. CDUAF has investment-grade credit ratings of BBB+ from Standard & Poor’s and A- from Fitch. This allows the company to raise capital at attractive terms.

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 continue to rise.

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 were under pressure during 2020 (though dividends were in reality covered from its operating cash flows if we are to exclude depreciation and amortization,) by 2027 we expect it to have returned to much more comfortable levels, of around 73% 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 it operates in a virtually recession-proof industry.

Valuation & Expected Returns

Using the current share price of ~$31 and expected earnings-per-share of US$1.77 for the upcoming fiscal year, CDUAF stock trades for a price-to-earnings ratio of 17.8. Our fair P/E multiple for Canadian Utilities is 16.

Therefore, the stock seems to be slightly overvalued at the current price level. Returning to our target price-to-earnings ratio by 2027 would reduce annual returns by 2.1% over this period of time.

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, CDUAF stock currently pays a quarterly dividend of CAD $0.442 per share. This works out to roughly CAD $1.78 per share on an annualized basis. At current exchange rates, this translates to an annualized dividend of $1.38 per share in U.S. dollars, for a 4.4% dividend yield.

Total returns could consist of the following:

• 4.0% earnings growth
• -2.1% multiple reversion
• 4.4% dividend yield

CDUAF stock is expected to return 6.3% per year through 2027. As a result, we have a hold recommendation on the stock, though the company’s ability to raise dividends through multiple recessions is impressive.

Final Thoughts

Canadian Utilities has a long growth record and has a positive future outlook. However, the stock has become overvalued. As a result, it may offer mid-single-digit returns over the next five years.

The stock should continue to pay and raise its dividend each year, as the business is likely to hold up well during recessions. It also has a high yield above 4% which is attractive to risk-averse income investors, such as retirees. Therefore, shares earn a hold rating.

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