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What are we looking for?

Large-cap Canadian utilities and pipeline stocks demonstrating earnings growth and solid dividends.

Anticipation of significantly higher short-term rates from the Bank of Canada put severe downward pressure on the Canadian utilities sector in 2018. While posting an 11.2-per-cent loss on a year-to-date basis, the S&P/TSX Capped Utilities Index has recently roared back to become one of the few sectors to post a positive performance during the fourth quarter. Investor perceptions of a slowing economy and subdued interest-rate increases have put the shine back on interest-rate sensitive stocks such as utilities and pipelines – long-time havens for conservative, income-seeking investors.

The screen

We will be using Trading Central Strategy Builder to search for large-cap Canadian utility and pipeline stocks with reasonable valuations, strong dividend yields and a track record of long-term earnings growth.

We will start by screening for Canadian utility and pipeline stocks with a market capitalization in excess of $2-billion. This will enable us to focus on the larger, more stable and established players in the market.

To find stocks with attractive dividends, we will screen for companies with forward dividend yields of 3.5 per cent or more. We also wish to select stocks with healthy businesses and an established track record of growing their earnings. To do this, we will select only stocks with five-year growth rates in earnings per share of at least 5 per cent annually.

Finally, to ensure we don’t overpay for our investments, we will filter based on trailing price-to-earnings ratios of 30 or less.

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What we found

Our list contains three pipeline stocks with TransCanada Corp. being the largest with a market cap in excess of $46-billion. TransCanada also has the lowest P/E on our list at 14. Like many pipeline companies, the stock has been hammered this year, down 16.9 per cent in the past 12 months.

Among utility stocks, TransAlta Renewables Inc. has the second-lowest valuation on our list with a trailing P/E ratio of just 14.9. The company provides a very high dividend yield of 8.7 per cent and has a five-year EPS growth rate of 33.2 per cent.

Another notable stock is Fortis Inc., which has provided the best one-year price performance on our list – basically flat in a field of declining stocks. In the past quarter, Fortis has rallied strongly – up almost 9 per cent on expectations of subdued interest-rate increases and a flight to safety.

Utilities and pipeline stocks for dividends and profit growth

Company Symbol Recent Price ($) Mkt.Cap. ($Mil.) P/E Ratio (TTM) Div. Yield 5Y EPS Growth Rate 1Y Price Performance
TransCanada Corp. TRP-T 52.17 46,908.8 14.0 5.2% 10.1% -16.9%
TransAlta Renewables Inc. RNW-T 10.39 2,759.4 14.9 8.7% 33.2% -19.4%
Pembina Pipeline Corp. PPL-T 42.36 21,682.1 17.2 5.2% 21.0% -5.9%
Keyera Corp. KEY-T 27.43 5,767.7 17.5 6.4% 14.4% -21.7%
Fortis Inc. FTS-T 45.99 19,771.1 19.9 3.9% 13.0% -0.5%
Atco Ltd. ACO-X-T 38.49 4,470.4 21.4 3.9% 6.2% -14.9%
Canadian Utilities Ltd. CU-T 31.13 8,563.6 22.6 4.9% 5.3% -16.8%
Algonquin Power & Utilities AQN-T 13.95 6,697.2 26.5 4.8% 73.5% -1.4%

Trading Central

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of customer success at Trading Central.