ATCO LTD. (Toronto symbols ACO.X (class I non-voting) $38 and ACO.Y (class II voting) $39; Income Portfolio, Utilities sector; Shares outstanding: 57.9 million; Market cap: $2.2 billion; Price-to-sales ratio: 0.7; SI Rating: Above Average) is a Calgary-based holding company. ATCO’s main subsidiary is 52.3%-owned Canadian Utilities Ltd.. This business distributes natural gas and electricity in Alberta. It also operates power plants in Canada, the U.K. and Australia.

ATCO’s other businesses involve selling specialized services to other companies. These include building temporary structures, airfields and communication systems for resource and construction firms. It also offers billing and payment processing, natural-gas storage and travel services.

The company’s revenue fell from $3.3 billion in 2004 to $2.9 billion in 2005, after Canadian Utilities sold its non-regulated retail operations, which supplied households with natural gas and electricity. But revenue rose steadily, returning to $3.3 billion in 2008. Earnings more than doubled, from $130.9 million, or $2.28 a share, in 2004 to $265.6 million, or $4.60 a share, in 2008.

In the three months ended June 30, 2009, ATCO’s earnings rose 7.3%, to $49.7 million, or $0.86 a share, from $46.3 million, or $0.80 a share, a year earlier. Higher profits at Canadian Utilities were the main reason behind the gain. Strong growth at its structures business in the Middle East and South America was also a factor. However, the company’s revenue fell 9.6%, to $688.1 million from $761.3 million. The recession hurt electricity prices, and led to a 28% revenue drop at the power-generating operations.

ATCO is simplifying its complex operating structure. This includes reorganizing itself into three new groups: Utilities (distributing electricity and natural gas); Energy (operating power plants); and Structures & Logistics (supplying services to construction and other companies). ATCO’s information-technology and travel businesses are not part of this reorganization.

As part of this plan, ATCO merged its structures and noise-management businesses with Canadian Utilities’ Frontec division. Frontec builds and operates various projects on behalf of its clients, usually in remote areas. ATCO now owns 75.5% of the combined company, which is called ATCO Structures & Logistics Ltd. (Canadian Utilities owns the other 24.5%.) This business is a major part of ATCO’s new Structures & Logistics division.

Plenty of cash for more dividends

ATCO’s shares have stayed between $35 and $40 in the past year. That’s partly because the Southern family controls 83.4% of the votes, which limits the chance of a takeover. As well, its $1.00-a-share dividend yields just 2.6%, compared to Canadian Utilities’ $1.41-a-share dividend, which yields 3.8%. But dividends, including those paid to Canadian Utilities’ shareholders, accounted for just 18% of ATCO’s 2008 cash flow. That gives it lots of room to increase the rate, or pay a special dividend.

ATCO holds cash of $1.2 billion, or $20.43 a share. Its $3.2-billion long-term debt seems high, at 1.5 times its market cap. But ATCO’s regulated utilities generate plenty of steady cash flow for debt repayments or investments in new plants and equipment. They should also help it with its plan to develop new hydroelectric projects in northern Canada. The stock trades at a low 9.0 times ATCO’s forecast earnings of $4.20 a share.

ATCO is a buy. We’re adding it to our Portfolio for Income-Seeking Investors. The more liquid class I non-voting shares are the better choic