The City of Toronto could raise as much as $150-million by selling a 10 per cent stake in Toronto Hydro via an initial public offering that would be popular with investors seeking dividend stocks.
Similar companies tend to trade at valuations that suggest that all of Toronto Hydro could be worth around $1.2-billion to $1.5-billion. The city manager and chief financial officer recommended the city look at an IPO for 10 per cent of the company to raise money to keep Toronto's debt down.
There would be an appetite among dividend-hungry investors for another utility stock that makes steady cash payouts to investors, bankers said. About the only stocks that consistently sell well in initial public offerings in these rocky markets are companies with big dividends.
Currently, Toronto Hydro pays out 50 per cent of its earnings in dividends to its sole shareholder, the City of Toronto. Last year, the dividend totalled $25-million.
"If the dividend is high, people will be interested," said one banker with experience in pricing and selling IPOs. "If the city still owns 90 per cent, it will be highly incented to keep the dividend high."
Utilities, bankers say, trade at something like 16 to 20 times net income. Last year, Toronto Hydro booked net income of $66-million. On that basis, Toronto Hydro would be worth about $1.05-billion to $1.3 billion.
Others value utilities on multiple of earnings before interest, taxes, depreciation and amortization. A typical multiple is something like 10 times. There's no exact EBITDA number on Toronto Hydro's income statement, but there's something close, at about $156-million. That implies a valuation of as much as $1.56-billion.
However, looking at it from a dividend-yield point of view, the valuation could be lower. The company pays out 50 per cent of net income in dividends, currently. At net income last year of $66-million, that's $33-million of potential dividends. At a 5 per cent dividend yield, that implies a valuation that's much lower, in the $660-million range.
Aside from price, there would be hurdles. Some investors might be wary of being minority shareholders in a company that is majority-owned by a city government, leaving them beholden to the whims of politicians.
There is also the issue of Toronto Hydro's tax status. By selling only 10 per cent, Toronto Hydro could keep its tax-exempt Crown corporation status. Were the city ever to sell more, the company would become taxable and that would hurt the valuation.
"You have to think through how to deal with that 10 per cent," said a second banker. "You need a path for more liquidity."
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