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What are we looking for?
Dividend-paying utility companies have become popular among investors.
However, merely assuming that electrical utilities will automatically be profitable is risky. Atlantic Power Corp. proved that last month.
The Boston-based company has 32 power projects in major North American centres, yet reported weak fourth-quarter results and lowered its guidance, while cutting its dividend 65 per cent. The stock has fallen more than 60 per cent since November.
My colleague Sean Pugliese and I thought we would take a closer look at Canada's utility companies.
The screen
The companies in the accompanying list are sorted by market capitalization, and all are larger than $300-million. All numbers in the list are forward looking and are based on analysts' consensus estimates as reported by Bloomberg.
Investors like dividends and higher yields are usually better. The expected dividend yield listed in the table is the dividend payment over the next 12 months, divided by the current share price.
Beyond dividends, we took a close look at each firm's enterprise-value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA). Enterprise value is the sum of a company's stock and net debt. The lower the EV/EBITDA multiple, the better.
The AFFO, or adjusted funds from operations, is a firm's funds from operations with adjustments made for recurring capital expenditures. The lower a company's price-to-AFFO, the better.
The AFFO payout ratio is future dividends divided by the AFFO. It is a key metric used to determine the safety of the distribution, and the potential for distribution increases. A low number is preferred.
What did we find?
Fortis Inc. is the largest Canadian utility company in terms of customers and has raised its dividend every year for the past 40 years. Still, its payout ratio is still only a little over 48 per cent.
Capital Power Corp. has a fleet of 15 facilities in Alberta and the company shows very well in all categories on this screen. With operations in Canada, Sweden and Britain, Capstone Infrastructure Corp. also stands out.
On the other hand, investors would be well advised to exercise caution when considering Just Energy Group, TransAlta Corp. and Northland Power Inc.