Should I say CU later to Canadian Utilities?

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I’m trying to decide whether to sell or keep Canadian Utilities Ltd. (CU). The stock price has gone sideways since I bought it in 2015, and dividend growth has slowed dramatically. What are your thoughts?

Utilities have a reputation for being boring, stodgy investments, and Calgary-based Canadian Utilities Ltd. Canadian Utilities Ltd. has certainly lived up to that stereotype.

For the 10 years ended Oct. 31, the shares posted a total return – including dividends – of 5.6 per cent on an annualized basis. That trailed the return of 8.8 per cent for the S&P/TSX Composite Index and also lagged other utilities such as Fortis Inc. (FTS), Emera Inc. (EMA) and Algonquin Power & Utilities Corp. (AQN), all of which beat the index.

Moreover, most of Canadian Utilities’ return over the past decade came from its dividend, which until a few years ago was growing at about 10 per cent annually. The latest increase, announced in January, was a paltry 1 per cent.

Unfortunately, the company could continue to test investors’ patience, at least in the near term.

Growth in Canadian Utilities’ rate base – the value of assets on which a utility is permitted to earn a regulated rate of return – has slowed in its core Alberta market, which is still reeling from several years of low oil prices even as the commodity has been rebounding recently.

What’s more, compared with some of its peers, Canadian Utilities has been slow to invest in decarbonization and energy-transition projects to supplement the modest earnings growth from its regulated electric and gas utility operations. That’s changing, but probably not quickly enough to have an immediate impact on the stock.

During the third quarter, for example, the company acquired three solar development projects in Alberta, with commercial operations expected to begin in late 2022. The company has also entered into a partnership to build a renewable natural gas facility, located east of Edmonton, which will produce carbon-neutral RNG from municipal and agricultural organic waste, with completion also expected late next year.

Some larger projects will take more time. Perhaps most significantly, the company plans to develop a multibillion-dollar clean hydrogen production facility near Fort Saskatchewan, Alta., in partnership with Suncor Energy Inc. (SU). A final investment decision is still likely several years away, however, and if all goes smoothly the project could be fully operational by 2028.

As for the dividend, which currently yields about 5 per cent, the good news is that analysts expect the company will continue to increase its payout as it has done for 49 consecutive years. The bad news is that increases will likely continue to be in the low single digits on a percentage basis for the next few years at least, analysts say.

So is it time to sell? Not necessarily. Given Canadian Utilities’ relatively slow growth, the stock trades at a multiple of about 16 times estimated 2021 earnings, which is a steep discount to the average price-to-earnings multiple of about 20 for other utilities. The low P/E could limit the stock’s downside while providing more room for potential share price gains when Canadian Utilities’ renewable investments begin to bear fruit.

Contributions from other assets, including a recent joint venture to modernize and operate Puerto Rico’s electricity system, could also help the stock.

The utility’s non-regulated investments in renewables and the Puerto Rico joint venture likely won’t underpin dividend growth the way regulated transmission and distribution have, Elias Foscolos, an analyst with iA Capital Markets, acknowledged in a note. But, he added, “we believe CU is not getting full credit for its growth potential, resulting in an unduly wide discount to peers.”

Not everyone is bullish. Mr. Foscolos is one of just three analysts with a buy recommendation on the stock. The remaining six rate it a hold, according to Refinitiv. The average price target is $37.42, which is 5.8 per cent above Canadian Utilities’ closing price of $35.36 on Friday.

If you’re looking for excitement, Canadian Utilities is probably not your best bet. On the other hand, if you want an attractive yield and the steady, reliable returns of a utility – with potential for accelerating growth as the company’s diversification efforts progress – consider hanging on to your shares.

I have a question about the takeover of Inter Pipeline Ltd. (IPL) by Brookfield Infrastructure Partners LP (BIP.UN), which was completed a few days ago. Based on the terms of the offer, I expected to receive 0.25 Brookfield Infrastructure Corp. (BIPC) shares for each IPL share. However, I held 1,265 shares of IPL and received only 294 shares of BIPC plus about $1,700 of cash, instead of the expected 316.25 shares. Why is that?

Inter Pipeline shareholders were given a choice to receive either $20 in cash for each IPL share or 0.25 of a BIPC share (or, alternatively, an Exchangeable LP Unit). However, because the number of BIPC shares and Exchangeable LP Units was capped, some investors who elected to receive shares were subject to proration, which meant they received a portion of the payment in cash.

Disclosure: The author owns shares of CU, FTS, EMA, AQN and BIP.UN personally and in his model Yield Hog Dividend Growth Portfolio. View the portfolio online at tgam.ca/dividendportfolio.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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