Don't Overlook This High Yield Dividend Stock Up North

Utility stocks are prized by their investors because of their high dividend yields and stable payouts. What's more, utilities typically hold up extremely well during recessions, as their extremely consistent business models generate reliable dividends for shareholders year after year. Investors might instinctively think of U.S.-based utility stocks, but Canadian Utilities Limited is a high-quality utility stock that receives much less attention. Many U.S. utility stocks have elevated valuations, and as a result dividend yields across the sector have fallen. The Utilities Sector SPDR , the major ETF tracking U.S. utility stocks, yields approximately 3.6% right now. Canadian Utilities has a much higher dividend yield of 5.1%, making it a more attractive stock for income investors relative to the broader utility sector ETF. Canadian Utilities also has a very long history of increasing its dividend. It should continue to increase its dividend even in a severe recession. Risk-averse income investors looking for high-quality blue-chip stocks should not overlook Canadian Utilities. Steady Results in Troubled Times Canadian Utilities is a diversified utility that operates in electricity, pipelines and liquids, and retail energy. The company has assets of $20 billion. ATCO owns 52% of Canadian Utilities. Approximately 95% of the company's adjusted earnings in 2019 came from regulated activities. The benefit of the utility business model is consistent profit generation year after year. Even in recessions, people will always need heat and electricity. This places a high floor underneath earnings power for utilities. That said, Canadian Utilities has not been completely immune from the global economic downturn so far in 2020. In the first quarter, revenue fell 26% while adjusted net income dropped 10.5% year over year. Adjusted earnings per share declined 10% for the quarter. However, the core utilities segment continued to perform well, with 5.6% growth in adjusted segment earnings due to rate base growth and a lower tax rate. Adjusted net earnings fell 17% in the Energy Infrastructure segment. Despite the decline in revenue and adjusted EPS, the company remained profitable and maintained its dividend. Canadian Utilities has a stable business model that allows for modest growth over time. It has enough new projects for future growth, and it also grows profits from rate increases. Through a combination of customer growth and rate base increases, investors can reasonably expect high-quality utilities like Canadian Utilities to generate EPS growth a couple of points above GDP growth. Researching this stock leads us to an EPS growth rate estimate of 5% annually over the next five years for Canadian Utilities. The dividend is sufficiently covered, allowing for continued dividend growth in the years ahead. Power Up Your Dividend Portfolio The company prides itself on having Canada's longest consecutive years of dividend increases, with a 48-year streak. Its long history of dividend growth is due to the company's resilient business model and steady earnings growth over the past several decades. The company's competitive advantage is its wide economic moat as a regulated utility. Due to extremely high barriers to entry, regulated utilities enjoy an oligopolistic market, with few competitive threats. The company's resiliency has been proven for decades. Despite multiple recessions over the past 47 years, the company has withstood every single one of them, while maintaining its dividend increases each year. Another competitive advantage is its strong financial position. Canadian Utililities has a credit rating of A- from Standard & Poor's. This allows the company to raise capital on attractive terms, which it can invest in growth to continue raising its dividend every year. Canadian Utilities currently pays a quarterly dividend rate of C$0.4354 per share. This works out to an annualized dividend of approximately CAD$1.74 per share. Investors should note that buying stocks based in Canada brings exposure to currency risk. In U.S. dollars, the company currently pays an annualized dividend of approximately $1.28 per share in U.S. dollars. This represents a current dividend yield of 5.1%. Canadian Utilities is a relatively attractive income stock, particularly since many U.S.-based utility stocks have significantly lower dividend yields. XLU has a yield below 4%, while the broader S&P 500 Index average yield is less than 2% right now. At a time when U.S. stocks are on average trading for elevated valuations, Canadian stocks across a number of sectors such as banks and utilities are offering relative value and yield. Canadian Utilities is an example of this trend, as it has a higher dividend yield and lower stock valuation than many U.S. based utilities. We expect the company to report full-year EPS of approximately US$2.16 per share for 2020. Based on this, the stock has a P/E ratio of 11.7, below our fair value estimate of 14. Canadian Utilities is trading at a nearly decade-low P/E ratio, near the valuation level of the Great Recession period. By comparison, XLU has an average price-to-earnings ratio of 17.7, significantly above Canadian Utilities' valuation multiple. We believe a higher valuation multiple is warranted, considering the company's relative stability and long history of steady dividend increases. If the stock valuation moved up to a P/E ratio of 14, annual returns to shareholders would be boosted by 3.7% per year over the next five years. EPS growth and dividends will also add to shareholder returns. We expect 5% annual EPS growth per year, consisting of revenue growth achieved through customer additions and rate increases. Combined with the 5.1% dividend yield, our estimate for total returns is above 13% per year through 2025. This is a highly satisfactory expected rate of return for a sleepy utility company. Final Thoughts The global economic outlook remains highly uncertain. In recessions, income investors looking for relative safety should consider buying utility stocks. Canadian Utilities stands out among the crowd in the utility sector, due to its high dividend yield, low stock valuation, and long history of annual dividend increases. We view the company's dividend as safe, even in a severe recession. At a time when so many companies are cutting or suspending their dividends, Canadian Utilities is highly attractive for income investors looking for high yields and safe payouts.

Don't Overlook This High Yield Dividend Stock Up North

This company prides itself on having Canada's longest consecutive years of dividend increases, with a 48-year streak.

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