canadian utilities

BMO S&P/TSX Laddered Preferred Share Index ETF, $10.93, symbol ZPR on Toronto (Units outstanding: 90.6 million; Market cap: $990.3 million; www.etfs.bmo.com), holds Canadian floating-rate preferred shares. Issuers include Bank of Montreal, Enbridge, BCE, TransCanada and Canadian Utilities. The fund’s MER is 0.45%, and it currently yields 4.9%. Note that the dividends you receive from this fund benefit from the Canadian dividend tax credit. Floating-rate preferred shares pay dividends that fluctuate with changes in interest rates. The dividend rate may range from 50% to 100% of (usually) the prime bank rate. As interest rates rise, so do floating-preferred dividend yields....

CANADIAN UTILITIES LTD. $36 (www.canadianutilities.com) has spent $617 million in the first half of 2015 to expand its power plants, transmission lines and pipelines in Alberta. However, higher corporate taxes in that province, as well as writedowns, offset the extra revenue from these operations....

Our take on whether Germany’s demand for more wind power will keep cash flowing for high-yielding Canadian dividend stock Northland Power.

MOLSON COORS CANADA INC. $94 (www.molsoncoors.com) earned $1.41 a share in the three months ended June 30, 2015, down 10.2% from $1.57 a year earlier (all amounts expect share price in U.S. dollars). Its worldwide beer volumes fell 1.9%, mainly due to the termination of deals to brew certain beers in Canada and the U.K....

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $44 and ACO.Y [class II voting] $44; Income Portfolio, Utilities sector; Shares outstanding: 115.1 million; Market cap: $5.1 billion; Price-to-sales ratio: 1.1; Dividend yield: 2.3%; TSINetwork Rating: Above Average; www.atco.com) holds 53.2% of Canadian Utilities (see page 53). The company 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 the three months ended March 31, 2015, the company earned $94 million, or $0.82 a share. That’s down 26.0% from $127 million, or $1.10. Revenue declined by 12.6%, to $1.1 billion from $1.2 billion.

Lower earnings at Canadian Utilities hurt ATCO’s profits. As well, the structures business completed two big contracts in late 2014. As a result, this division’s earnings fell by $11 million in the latest quarter.

However, ATCO recently started working on a $125-million contract to build worker shelters at the Wheatstone liquefied natural gas project in Western Australia. It expects to finish these buildings by the end of the year.

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CANADIAN UTILITIES LTD. (Toronto symbols CU [class A non-voting] $37 and CU.X [class B voting] $37; Income Portfolio, Utilities sector; Shares outstanding: 264.5 million; Market cap: $9.8 billion; Price-to-sales ratio: 2.8; Dividend yield: 3.2%; TSINetwork Rating: Above Average; www.canadian utilities.com) distributes electricity and natural gas in Alberta and Australia. It also operates 18 power plants in Canada, Australia and the U.K. ATCO Ltd. owns 53.2% of the company.

Canadian Utilities plans to spend $5.8 billion on upgrades between 2015 and 2017. It will devote $5.1 billion of that to its regulated operations, including $1.2 billion to make Alberta’s power grid more reliable.

The remaining $700 million will go to unregulated businesses, including $500 million for new power lines in the Fort McMurray area. The company owns 80% of a joint venture that will build this project. Quanta Services (New York symbol PWR) will own the remaining 20%. Meanwhile, Canadian Utilities earned $174 million, or $0.61 a share, in the three months ended March 31, 2015.

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In addition to TransCanada (see page 51), we like these three pipeline operators’ prospects. All of them are investing in projects that will spur their cash flows—and dividends—for years to come. ENBRIDGE INC. $61 (Toronto symbol ENB; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 855.0 million; Market cap: $52.2 billion; Price-to-sales ratio: 1.5; Dividend yield: 3.0%; TSINetwork Rating: Above Average; www.enbridge.com) gets 90% of its revenue from pipelines that pump oil and natural gas from Western Canada to Eastern Canada and the U.S. The remaining 10% mainly comes from distributing gas to 2.1 million consumers in Ontario, Quebec, New Brunswick and New York State. The company plans to spend $44 billion on new pipelines and expansions between 2014 and 2018. It completed $9.8 billion worth of that total in 2014 and expects to finish another $8.7 billion worth this year. Enbridge has already secured shipping contracts for $34 billion worth of these projects, which cuts its risk....

A holding company is a company that owns all or a substantial part of a variety of different businesses. These businesses may be private companies, or publically traded. Holding companies may own all, or a majority or a minority, of companies in which they invest. The one thing most holding companies have in common is that they trade for less than the combined value of their holdings. This “holding company discount” is a well-known phenomenon in finance. It represents a special kind of hidden asset and potential profit for investors in holding companies. When holding companies sell assets or break themselves up into their constituent parts, much if not all of the discount may disappear. In other words, holding companies can usually sell their assets for fair market value, rather than at a discount. In addition, fair market value may turn out to be be more than analysts figured they were worth. Even without a break-up, buying a holding company at a discount to its asset value puts more assets to work for you for each dollar you invest....

EMERA INC. $43 (www.emera.com) earned $2.23 a share in 2014, up 13.8% from $1.96 in 2013. Revenue jumped 33.3%, to $3.0 billion from $2.2 billion. These gains are largely due to the company’s November 2013 purchase of three gas-fired power plants in New England for $541 million U.S. Higher earnings from its energy-trading business also contributed to the increase. In addition, Emera raised its quarterly dividend by 3.2% with the May 2015 payment, to $0.40 a share from $0.3875. The new annual rate of $1.60 yields 3.7%. Best Buy. CANADIAN UTILITIES LTD. $40 (www.canadianutilities.com) has raised its quarterly dividend by 10.3%, to $0.295 a share from $0.2675. The new annual rate of $1.18 yields 3.0%. Buy. ATCO LTD. $48 (www.atco.com) is the parent company of Canadian Utilities (see above). It recently raised its dividend by 15.1%. The new annual rate of $0.99 yields 2.1%. Best Buy....

ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $48 and ACO.Y [class II voting] $48; Income Portfolio, Utilities sector; Shares outstanding: 115.1 million; Market cap: $5.5 billion; Price-to-sales ratio: 1.3; Dividend yield: 2.1%; TSINetwork Rating: Above Average; www.atco.com) holds 53.2% of Canadian Utilities (see left). It also owns 75.5% of ATCO Structures & Logistics, which builds temporary buildings for construction and energy exploration firms; Canadian Utilities owns the remaining 24.5%.

The drop in oil prices is hurting growth at the structures business. As a result, ATCO likely earned $3.02 a share in 2014, down 10.9% from 2013. But higher earnings from Canadian Utilities should raise its 2015 earnings to $3.39 a share, and the stock trades at 14.2 times that estimate. The $0.99 dividend yields 1.8%.

Based on current prices, you can buy an ATCO share for $48 and get roughly $51 worth of Canadian Utilities. That means you get ATCO’s structures business, which provides around 25% of its earnings, for free.

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