Canadian Utilities (TSX:CU) stock is well known for its high dividend yield. At 5.89%, it’s nearly double the yield on a a typical TSX index fund. However, CU stock has delivered almost no capital appreciation in recent years – in a full decade in fact. The stock’s most recent move upward that really “stuck” was in 2012. Since then, it has been volatile and ultimately flat long term. In this article, I will explore the factors behind CU’s sluggish performance, and attempt to gauge whether its performance can improve in the future.
Slow growth
One of the factors behind CU’s sluggish stock performance over the years has been slow earnings growth. Over the last five years, it grew at the following compounded annual (CAGR) rates:
- Revenue: -2.9%.
- Net income: 6.8%.
- Diluted earnings per share (EPS): 7.4%.
The top line growth was negative, although the growth in earnings was actually OK for a utility. Over a 10-year timeframe, the situation reverses:
- Revenue: 1.74%.
- Net income: 0.86%.
- Diluted EPS: -0.18%.
There was basically no growth over a 10-year period, hence the lack of movement in the stock. Were there any signs that the situation might improve in the most recent quarterly report? Truthfully, it was a mixed showing as well, featuring metrics like:
- $812 million in revenue, down 9.6%.
- $0.39 in earnings per share, up 21.8%.
- $0.32 in adjusted earnings per share, down 28%.
- $394 million in cash from operations, up 3.7%.
Profitability
One factor that Canadian Utilities has going in its favour is profitability. In the most recent 12-month period, its profitability ratios were:
- Gross profit margin: 67%.
- EBIT margin: 30%.
- Net margin: 17%.
- Return on equity: 11.3%.
These ratios suggest that CU is a very profitable company. As for whether it will continue to be profitable, I’d say the odds are pretty good. As a utility, it enjoys regular recurring revenue on long term contracts. It does have expenses to manage, but so far it seems to be doing a good job of managing them. There is one expense category that could become problematic. I’ll review that in the next section.
Debt
Debt – or rather, the interest on debt – is an expense category that could become problematic for Canadian utilities. The company has $9.7 billion worth of debt, which is about $4.7 billion more than it has in shareholders’ equity. The amount of debt has grown steadily over the last 10 years, a period in which earnings haven’t really grown. Thanks to the Bank of Canada’s interest rate hikes, the interest on CU’s debt is rising. In the last 12 months, Canadian Utilities had $448 million in interest expenses, up from $417 million in 2022. Rate hikes and debt growth are making their presence felt. On the other hand, despite these rising costs, CU is still paying out less than 100% of its earnings as dividends, so the payout is fairly safe.
The five-year forecast
Taking everything into account, I’d expect Canadian Utilities’ next five years to look like its previous five: steady and modestly growing dividends, but no capital appreciation. The company does not have many growth drivers and its interest costs are rising. This all makes for a high yield play where the dividend is all you’re likely to get.
