Canadian stocks listed in the U.S. tend to be undervalued relative to industry peers based in the U.S., offering a good margin of safety for the shareholders, and often higher dividend yields. They also allow investors to diversify beyond our borders. In this article, we'll profile three Canadian high-dividend stocks in three different industries that we like for their strong value and yield propositions today.
Follow the Path to Enbridge Inc.
Enbridge (ENB) is an oil & gas company that operates in Liquids Pipelines, Gas Distributions, Energy Services, Gas Transmission & Midstream, and Green Power & Transmission. Enbridge bought Spectra Energy for $28 billion in 2016 and has become one of the largest midstream companies in North America.
Enbridge reported its second quarter earnings results on Aug. 4, showing the company generated lower revenues during the quarter, but still managed to grow its adjusted earnings before interest, taxes, depreciation, and amortization by 8% year over year. This was possible thanks to expenses dropping faster than revenues. Enbridge generated distributable cash flows of $2.1 billion, or $1.04 on a per-share basis, which was up by 1% year over year.
The company is forecasting distributable cash flows in a range of CAD$5.25-5.65 per share for the current year. Using current exchange rates, this equates to USD$4.02 at the midpoint of the guidance range, which would be a new record for the company.
Enbridge produced extremely consistent distributable-cash-flow-per-share growth from 2009 to 2016, reporting positive growth every year, at a compelling growth rate of 10% annually. Continued growth is likely thanks to new projects. Enbridge put more than $10 billion worth of projects into service during the last two years, and more growth projects are under construction. According to management, growth will persist going forward, as Enbridge targets long-term cash flow per share growth of 5%-7%.
Enbridge is one of the largest pipeline operators in North America. Its vast asset footprint serves as a tremendous competitive advantage, as it would take tens of billions of dollars of investments from new market entrants if they wanted to be able to replace Enbridge's assets. Competitive risks, therefore, are low.
The company has increased its dividend for 27 consecutive years. Shares currently yield 7.5%.
The Heat Is On: Canadian Utilities
Canadian Utilities (CDUAF) is a utility stock with approximately 5,000 employees and that owns 53% of Canadian Utilities. Based in Alberta, Canadian Utilities is a diversified global energy infrastructure corporation delivering solutions in Electricity, Pipelines & Liquid, and Retail Energy. The company prides itself on having Canada's longest consecutive years of dividend increases, with a 51-year streak. This makes Canadian Utilities a Dividend King.
Canadian utilities reported its second-quarter results on July 27, revealing that revenues for the quarter amounted to about $663.5 million, 5.8% lower year-over-year (in constant currency), while adjusted earnings-per-share came in at $0.40, 27.5% lower year-over-year. Lower revenues were mainly due to cost efficiencies generated by Electricity Distribution and Natural Gas Distribution over the second-generation Performance Base Regulation (PBR) term now being passed onto customers under the 2023 Cost of Service rebasing framework. The decline in earnings was primarily driven by reduced revenues, which squeezed the company's margins.
By benefiting from a stable business model, Canadian Utilities can slowly but progressively grow its earnings. The company consistently invests in new projects and benefits from the base rate increases, which grow at around 3% to 4% annually.
The company's competitive advantage lies in the moat regulated utilities are surrounded by. With no easy entry in the sector, regulated utilities enjoy an oligopolistic market with little competition threat. The company's resiliency has been proven for decade after decade. Despite multiple recessions and uncertain environments over the half a century, the company has withstood every one of them while raising its dividend.
CDUAF stock currently yields 5.5%.
The Right Call: BCE Inc.
BCE Inc. (BCE) is a telecommunications and media company that provides communications services in the following business units: Bell Communication and Technology Services ("CTS"), which includes Wireless and Wireline, and Bell Media. BCE addresses residential customers as well as small- and medium-sized businesses and large enterprise customers.
BCE reported its second-quarter 2023 results on Aug. 3, showing that for the quarter, its operating revenues rose by 3.5% while adjusted EBITDA rose 2.1%. Bell CTS's operating revenue rose 4.3% while adjusted EBITDA for CTS rose 2.8%.
BCE's 2023 outlook remains as follows: revenue growth of 1-5%, adjusted EBITDA growth of 2-5%, and FCF growth of 2%-10%.
BCE's network is the fastest-ranked as well as the largest wireless network in Canada, which includes LTE coverage of more than 90% of Canadians and 5G coverage of ~85% of the Canadian population. Notably, BCE's dividend grew 2.9% a year from 2013 to 2022 based in U.S. dollars. Free cash flow is expected to rebound strongly by 2024 as it completes its 5G investments.
BCE's largest competitive advantage is the service it provides to its customers. As the Canadian operator with the best network, customers should be drawn to BCE, and the company's peers would have to invest billions to get the same assets. This is why the telecom industry is not threatened by new entrants, as market entry barriers are high. In most cases, the business is not cyclical, which makes BCE's business resilient through economic cycles.
BCE produces cash flows that are typically significantly higher than its net earnings. Normally, its free cash flow better supports its dividend than its earnings. In the short term, BCE can choose to sustain its dividend, having financial flexibility from available liquidity of around $4.4 billion in Canadian dollars (including $450 million CAD in cash) at the end of the second quarter. Shares currently yield more than 6%.
