2 blue chip utility stocks to buy

Here are two blue chip utility stocks to buy for continued growth and dividends. Canadian Utilities is engaged in the transmission & distribution of electricity and natural gas. Fortis Inc. is an electric and gas utility holding company with regulated utilities serving customers across Canada and in the United States and the Caribbean.

blue_chip_utility_stockShares of utility stock Canadian Utilities (TSX—CU) have risen just over 11 per cent since the beginning of the year; to date they show a one-year price gain of 10.6 percent. Some of this strength can be attributed to the company’s strong first-quarter earnings, which, on an earnings-per-share basis, exceeded the analysts’ consensus estimate by $0.04 a share. The higher earnings were a record, and were mainly due to continued capital investment and rate-base growth in regulated utilities.

Canadian Utilities, with assets of $19 billion, is an ATCO (TSX—ACO.X) company. ATCO, in turn, is a diversified global stock that delivers service and business solutions in: electricity (electricity generation, transmission and distribution); pipelines and liquids (natural gas transmission, distribution and infrastructure development, energy storage and industrial water solutions); and retail energy (electricity and natural gas retail sales).

For the three months ended March 31, 2017, Canadian Utilities made $215 million (adjusted), or $0.80 a share, compared with $197 million, or $0.74 a share, in 2016.

In the electricity segment, adjusted earnings rose 15.7 per cent, to $118 million, mainly due to continued capital investment, growth in rate base within regulated electricity, and lower operating costs.

In the pipelines and liquids segment, adjusted earnings rose 6.7 per cent, to $112 million, mainly due to continued capital investment and growth in the rate base within regulated pipelines and liquids.

Over the past five years, Canadian Utilities has invested nearly $10 billion in regulated utility and long-term contracted operations. The regulated utility portion of the company’s total adjusted earnings increased to 93 per cent in 2016, from 52 per cent in 2011. Management says its highly contracted and regulated earnings base provides a foundation for continued dividend growth.

Canadian Utilities pays a dividend of $1.43 and its shares yield 3.5 per cent. The stock trades at a reasonable 17.6 times 2017 earnings of $2.35 a share.

Canadian Utilities is a buy for growing income.

Fortis acquires interest in Waneta Dam

Utility stock Fortis Inc. (TSX—FTS) has agreed to purchase Teck Resources’ two-thirds interest in the Waneta Dam and related transmission assets in British Columbia for $1.2 billion cash. Fortis views Waneta as a stable, long-term asset that will generate strong cash flows secured by a 20-year lease with Teck. The transaction is expected to immediately add to earnings per share.

Fortis Inc. is a leader in the North American electric and gas utility industry, with total assets of about $48 billion. The company serves utility customers in five Canadian provinces, nine US states and three Caribbean countries.

The company had a good first quarter, though its earnings per share fell short of the consensus estimate by $0.02. For the three months ended March 31, 2017, Fortis made $281 million (adjusted), or $0.69 a share, compared with $190 million, or $0.67 a share, in the same period of 2016.

Earnings per share benefitted from a rate case by the Arizona Corporation Commission at Fortis’ subsidiary, UNS Energy, and the addition of earnings from ITC Holdings, the US electricity transmission company that Fortis acquired in October 2016.

Earnings per share growth, however, was tempered by a higher number of shares, due to the sale of 12.2 million common shares for $500 million to an institutional investor in March of this year.

Fortis’ earnings for 2017 will continue to benefit from the addition of ITC, and the rate case noted above. Longer term, earnings should rise, thanks to the company’s $13-billion capital program.

The stock trades at a reasonable 18.9 times the $2.48 a share that Fortis should earn in 2017. The annual dividend of $1.60 a share yields 3.4 per cent.

Fortis is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the July 2017/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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