International power plant operator pays a 5.1% dividend

This electricity and natural gas distributor operates in Canada, Australia and Mexico while holding all or part of 19 power plants and paying a high 5.1% dividend. It has raised its dividend every year since 1972.

Earnings are up 40% on better results from the plants while overall revenue grew 6.5%. The company also has several new projects scheduled over the next two years.

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CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting]; distributes electricity and natural gas in Alberta and Australia. It also holds all or part of 19 power plants—15 in Canada, 2 in Australia. and 2 in Mexico.

ATCO owns 52.3% of the company. In December 2017, Canadian Utilities transferred its 24.5% stake in ATCO Structures & Logistics to ATCO. As a result, the parent company now owns 100% of the structures and logistics business, which makes temporary buildings for construction, mining and energy-exploration firms. Canadian Utilities received $140 million for its stake.

If you exclude that sale and other unusual items, the company’s earnings in the three months ended September 30, 2018, jumped 40.0%, to $0.49 a share (or a total of $132 million) from $0.35 a share (or $94 million) a year earlier. Better results from Canadian Utilities’ power plants offset a decline for its pipeline business.

Meanwhile, the company is conducting a strategic review of its non-regulated Canadian power generation operations, which are mostly located in Alberta. That could lead to the sale or spinoff of some or all of those plants. In the latest quarter, power plants (including those outside of Canada) contributed 38% of the company’s total revenue.

Two coal-burning plants, Sheerness and Battle River, account for about a third of the overall generating capacity of its Canadian plants. In response to new environmental regulations, and with government, Canadian Utilities plans to convert those plants to burn natural gas. That should enhance their appeal to potential buyers.

Dividend Stocks: New projects in the pipeline as revenue rises

Overall revenue in the quarter gained 6.5%, to $990 million from $930 million. That’s mainly due to the $62 million payment the company received from the Alberta power regulator to help convert the Battle River plant from coal to natural gas. That provincial regulator has also hired the company to build and operate a new 500-km power transmission line between Edmonton and Fort McMurray, Alberta. The project will begin operating in June 2019.

Including that Fort McMurray line, Canadian Utilities plans to invest $4.5 billion in new projects between 2018 and 2020.

The company’s earnings will probably improve from $2.17 a share in 2018 to $2.24 in 2019. The stock trades at 13.8 times the 2019 forecast.

Starting with the March 2019 payment, Canadian Utilities will raise its quarterly dividend by 7.5%. Investors will then receive $0.4227 a share instead of $0.3933 a share. The new annual rate of $1.69 yields a high 5.1%.

The company has raised its dividend each year since 1972. Including this latest increase, that payment has increased an average of 9.6% annually over the last 5 years.

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


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