Updated on October 13th, 2022, by Nikolaos Sismanis

The Dividend Kings are a group of just 45 stocks that have increased their dividends for at least 50 years in a row. We believe the Dividend Kings are among the highest-quality dividend growth stocks to buy and hold for the long term.

With this in mind, we created a full list of all 45 Dividend Kings. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:

 

Each year, we individually review all the Dividend Kings. The next in the series is Canadian Utilities (CDUAF).

Canadian Utilities has increased its dividend for 50 consecutive years, which makes it the only Canadian company on the list of Dividend Kings. This article will analyze the company in greater detail.

Business Overview

Canadian Utilities is a utility stock with approximately 5,000 employees. ATCO owns 53% of Canadian Utilities. Based in Alberta, Canadian Utilities is a diversified global energy infrastructure corporation delivering solutions in electricity, pipelines & liquid, and retail energy.

The company has a long history of generating steady growth and consistent profits through the economic cycle.

Source: Investor Presentation

On July 28th, 2022, Canadian Utilities reported its Q2-2022 results for the period ending June 30th, 2022. Revenue for the quarter amounted to $726, 18.1% higher year-over-year, while EPS came in at $0.39 compared to a loss of $0.03 in Q2-2022. Higher revenue was mainly the result of rate relief provided to customers in 2021 in light of the COVID-19 global pandemic and, subsequently, the decision to maximize the collection of 2021 deferred revenues in 2022.

The growth in EPS was mainly due to inflation indexing on the rate base in Australia, the impact of the 2018-2019 General Tariff Application Compliance Filing decision, and the timing of operating costs in the Natural Gas Distribution business.

During the quarter, CDUAF also invested C$297 million in capital projects. Of this, approximately 83% was for its regulated utilities business, with the remaining 17% invested in its energy infrastructure business.

Growth Prospects

By benefiting from a stable business model, Canadian Utilities can slowly but progressively grow its earnings. The company consistently invests in new projects and benefits from the base rate increases, which tend to hover between 3% and 4% annually.

Because growth in the regulated utilities space remains rather limited, CDUAF is now seeking to expand its business through the strategic acquisition of renewable generation assets. The $730 million investment should provide the company with immediate scale and future growth through the development pipeline and enjoy the qualities of long-term purchase power agreements that are common in wind projects. Further, management expects that this investment will be accretive to cash flow and earnings in 2023.

Combining the company’s growth projects, the potential for modest margin improvements, and – as voluntarily pursued – the postponed rate base increases, we retain our expected growth rate at 4%. Our DPS CAGR estimate remains at 2.5%.

The company will likely improve its payout ratio before its new projects start producing enough cash flows to re-accelerate dividend growth. The stock’s impressive 10-year dividend CAGR of 9.6% is more than enough to compensate for the FX fluctuations, progressively growing investors’ income.

Competitive Advantages & Recession Performance

The company’s competitive advantage lies in the moat surrounding regulated utilities. With no easy entry into the sector, regulated utilities enjoy an oligopolistic market with little competition threat. The company’s resiliency has been proven decade after decade.

Another competitive advantage is the company’s strong financial position. CDUAF has investment-grade credit ratings of BBB+ from Standard & Poor’s and A- from Fitch. This allows the company to raise capital at attractive terms.

The company also has a strong balance sheet with a well-laddered debt maturity profile, which will help keep the dividend sustainable, even if interest rates continue to rise.

Source: Investor Presentation

Despite multiple recessions and uncertain environments over the past 50 years, the company has withstood every one of them while raising its dividend. While Canadian Utilities’ payout ratio came under pressure during 2020 (though dividends were in reality covered from its operating cash flows if we are to exclude depreciation and amortization,) by 2027, we expect it to have returned to much more comfortable levels of around 71% of its net income.

The company held up extremely well during previous recessions and economic downturns, such as the coronavirus pandemic. We would expect Canadian Utilities to perform relatively well in future recessions, given that it operates in a virtually recession-proof industry.

Valuation & Expected Returns

Using the current share price of ~$25 and expected earnings-per-share of US$1.73 for the upcoming fiscal year, CDUAF stock trades for a price-to-earnings ratio of 14.4. Our fair P/E multiple for Canadian Utilities is 16.

Therefore, the stock seems to be modestly undervalued at its current price level. Returning to our target price-to-earnings ratio by 2027 would boost annual returns by 2.1% over this period of time.

Aside from changes in the price-to-earnings multiple, future returns will be driven by earnings growth and dividends.

We expect 4% annual earnings growth over the next five years, as utilities are generally slow-growth businesses. In addition, CDUAF stock currently pays a quarterly dividend of CAD $0.442 per share. This works out to roughly CAD $1.78 per share on an annualized basis. At current exchange rates, this translates to an annualized dividend of $1.35 per share in U.S. dollars for a 5.4% dividend yield.

Total returns could consist of the following:

• 4.0% earnings growth
• 2.2% multiple expansion
• 5.4% dividend yield

CDUAF stock is expected to return 10.5% per year through 2027. As a result, we have a buy recommendation on the stock and remain confident in the company’s ability to raise dividends through a recessionary environment.

Final Thoughts

Canadian Utilities has a long growth record and a positive future outlook. We currently find the stock modestly undervalued as well. As a result, shares may offer low-double-digit returns over the next five years.

The stock should continue to pay and raise its dividend each year, as the business is likely to hold up well during recessions. It also has a high yield of above 5%, which is attractive to risk-averse income investors, such as retirees. Therefore, shares earn a buy rating.

Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:

If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases: