Diversified markets contribute to a 17.9% earnings jump for Canadian Utilities Ltd.

Higher output and rates—plus improved efficiency and lower income taxes—led to a 17.9% jump in earnings for this utility in the most-recent quarter.

The company is also selling a major Canadian transmission line to lower its debt. Its stock trades at just 17.6 times the 2019 earnings forecast and yields a high 4.4%.

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CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] and CU.X [class B voting]; www.canadianutilities.com) distributes electricity and natural gas in Alberta and Australia. It also holds all or part of 21 power plants—17 in Canada, 2 in Australia and 2 in Mexico. ATCO (see right) owns 52.2% of the company.

We also like its parent company, ATCO. Investing in that firm lets you buy the same businesses as Canadian Utilities, but at a discount. ATCO has also simplified its operations in the past few years. That should help shrink its holding company discount and push up its share price.

Canadian Utilities will now sell its 80% stake in Alberta PowerLine. The joint venture has completed a new 508-km power transmission line between Edmonton and Fort McMurray, Alberta. Quanta Services Inc. owns the other 20%.

The company will receive $300 million for its stake. The buyers will also assume $1.4 billion of debt related to the joint venture. After the sale, Canadian Utilities will continue to operate the line under 35-year contracts with Alberta’s power regulators.

Dividend Stocks: Earnings jump on higher electricity rates

If you exclude unusual items, Canadian Utilities’ overall earnings in the three months ended June 30, 2019, jumped 17.9% to $0.46 a share (or a total of $126 million). A year earlier, the company earned $0.39 a share (or $107 million). The stronger earnings are due to higher rates for electrical power and pipeline space. Better efficiency and lower income taxes also contributed to the gain.

Revenue fell 6.7%, to $902 million from $967 million. That’s mostly because Canadian Utilities has now finished the Alberta PowerLine project. As a result, it no longer recognizes revenue it receives from the province’s power regulator.

The company will probably earn $2.20 a share in 2019, and the stock trades at 17.6 times that forecast. The $1.69 dividend yields a high 4.4%.

Canadian Utilities’ high-quality assets provide it with plenty of cash flow for shareholder dividends. That cash flow also helps explain why we have recommended the stock as a top pick for income seekers since 1995.

Recommendation in The Successful Investor: Canadian Utilities is a buy.


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