ATCO LTD. ACO.X $39 and ACO.Y $39

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $39 and ACO.Y [class II voting] $39; Income Portfolio, Utilities sector; Shares outstanding: 115.0 million; Market cap: $4.5 billion; Price-to-sales ratio: 1.1; Dividend yield: 2.9%; TSINetwork Rating: Above Average; www.atco.com) gets most of its earnings from its 53.1% stake in Canadian Utilities (see page 44). It also owns 75.5% of ATCO Structures & Logistics, which makes temporary buildings for construction, mining and energy exploration firms; Canadian Utilities owns the other 24.5%. In December 2015, the company sold its ATCO Emissions Management subsidiary for $60 million. This business helps producers of oil, gas and electricity reduce air and noise pollution. In 2015, ATCO earned $154 million, or $1.33 a share. That’s down 63.3% from $420 million, or $3.64, in 2014. If you exclude all unusual items, including a $16-million gain on the sale of the emissions management business, earnings dropped 21.7%. Revenue fell 9.3%, to $4.1 billion from $4.6 billion. These declines are mainly due to lower power prices in Alberta. Oil drillers and mining firms are also spending less on temporary structures. ATCO recently raised its quarterly dividend 15.2%, to $0.285 a share from $0.2475. The new annual rate of $1.14 yields 2.9%. The company has now increased its dividend each year since 1993. ATCO’s main appeal is its “holding company discount:” based on current prices, you can buy an ATCO share for $39 and get roughly $43 worth of Canadian Utilities. This means you get the structures business, which provides 20% of ATCO’s revenue, for free. The company has no plans to split itself up right now, but the chance of a spinoff adds appeal. ATCO’s complex structure makes it harder to value than “pure play” firms. That’s why its p/e is lower than Canadian Utilities: its shares trade at 13.4 times the $2.90 a share that ATCO will likely earn in 2016. The class I (X) non-voting shares are more liquid than the class II (Y) voting shares. ATCO class I stock is a buy.