Canadian Utilities

Investors Friend: As the name suggest, Canadian Utilities (TSX: CU) is a utility company which offers gas and electricity services. The group operates through three division viz. Electricity, Pipeline and Liquids and Retail Energy. Moreover, it is also an investor friendly stock. Canadian Utilities has the longest track record of boosting investors’ return through higher dividends. Investors should note that Canadian Utilities has continuously increased its dividends in the past 48 years, which is phenomenal.

Dividend History (Source: Company Reports)

On March 31, 2020, the company announced the second quarter dividend of CAD 0.4354 per share. Moreover, it paid total dividends of CAD 119 million in the first quarter of 2020.  It has paid dividends worth CAD 462 million in FY19.    

Q12020 performance: On May 1, the company reported its first quarter results. Also, the company notified that COVID-19 outbreak, oil price decline, and weak global economy didn’t impact its first quarter results in the utilities segment. During the first quarter, the company posted revenues of CAD 885 million, which implies a decline of CAD 304 million from the prior year quarter. Notably, the steep decline in revenues reflects the sale of its Canadian fossil fuel-based electricity generation portfolio and APL in the prior year. Canadian Utilities adjusted earnings came in at CAD 179 million, as compared to CAD 200 million in the prior year quarter, primarily due to the planned divestitures. Excluding the impact of divestitures, the company’s earnings increased by CAD 8 million over the prior year, thanks to the utility rate base growth, cost efficiencies, and lower taxes. 

Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): Price to Cash Flow Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months.

Stock recommendation: In the past eight years, Canadian Utilities has invested over CAD 12 billion in its rate-regulated operations. Investors should note that Canadian Utilities generates 95% of its adjusted earnings through the rate-regulated utility business, which ensures steady cash flows and provides the foundation for consistent dividend growth. We believe rate base growth and cost and productivity saving measures will continue to drive its profitability in the coming quarters. Canadian Utilities stock is down by about 14% so far this year and offers a lucrative dividend yield of 5.2%. We have valued the stock using price to cash flow method. We have considered Emera Inc (TSX: EMA), Hydro One Ltd (TSX: H), AltaGas Ltd (TSX: ALA) etc. as peer group and arrived at a target price which implies a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on CU stock at the closing market price of CAD 33.82 per share on May 5, 2020.

CU One-Year daily Price Chart (Source: Thomson Reuters).

Shaw Communications

Lucrative Dividend Yield: Shaw Communications Inc. (TSX: SJR.B) is among the Canada’s leading diversified telecom companies. Though the company is smaller than the Big Three telecom giants including Rogers Communications Inc (TSX: RCI.B), BCE Inc (TSX: BCE) and Telus Corp (TSX: T), it is growing at a brisk pace, especially in the wireless segment. The company operates through two business segments including the Wireless and Wireline. The company’s Wireless division offers wireless voice and LTE data services through its Freedom Mobile brand. Meanwhile, the company’s Wireline division provides broadband internet, Shaw Go WiFi, and video (including BlueCurve TV) to residential customers. Besides, it also provides traditional home phone services. The Business division offers internet, WiFi, data, digital phone, and video services to small and mid-sized businesses.

Steady payout: Shaw Communications currently offers a lucrative dividend yield of 5.2%. Investors shouldn’t worry much as despite the challenges from the COVID-19 outbreak as Shaw Communications remains well-positioned to generate significant amount of cash flows, which is likely to support its dividends and growth initiatives in the coming quarters. Notably, the company has maintained its dividends over the past several years while investing in its strategic initiatives, which is commendable. The company did announce a temporary layoff of about 10% of its workforce, mainly in the retail and sales roles. However, it continues to pay dividends.

Dividend History (Source: Company Reports)

Valuation Methodology (Illustrative):  EV/EBITDA Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: Shaw Communication is an ideal income stock, thanks to the company’s ability to generate strong cash flows. Shaw Communications’ innovative pricing and investments in network infrastructure is likely to drive RGUs in the coming quarters. We have valued the stock using relative valuation methods, i.e., EV/EBITDA and for the said purpose, we have considered peers like Cogeco Communications (TSX: CCA), Rogers Communications, Telus Corp, and BCE Inc (TSX: BCE) to name a few.  We have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the closing market price of CAD 22.82 per share on May 5, 2020. 

 SJR.B One-Year Daily Price Chart (Source: Thomson Reuters).

Royal Bank of Canada

Ideal Income Stock: Royal Bank of Canada (TSX: RY) is Canada’s largest bank and serves 17 million customers across 36 countries. The bank operates through five segments that include Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets. The bank will report its second quarter result on May 27.

Strong legacy of dividend payout:  Royal Bank of Canada is a perfect stock for investors seeking steady income. The bank has a long history of rewarding its investors through increased dividends and share buybacks. Investors should note that Royal Bank of Canada has increased its dividends by a CAGR of 7% since 2009. In FY19, the bank paid dividends worth CAD 5.8 billion, representing a dividend payout ratio of 46%. We believe near-term hiccups from COVID-19 outbreak to affect Royal Bank of Canada’s financial performance. However, the target payout ratio of 40%-50% is still sustainable in the long run. In the first quarter of FY20, Royal bank of Canada raised its quarterly dividend by 3% to CAD 1.08 per share and paid CAD 2.2 billion to its shareholders, including CAD 1.5 billion in the form of dividends. RY’s current dividend yield stands at 5.1%, which looks attractive.

Dividend History (Source: Company Reports)

Valuation Methodology (Illustrative): Price to Book Multiple Approach 

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months.

Stock recommendation: Royal Bank of Canada has a solid track record of growing loans and deposits over the past several years despite competitive headwinds. Notably, RY’s loans and deposits increased by ~6% and 10%, respectively in FY19. While challenges persist in the near-term, RY’s loan book is fairly diversified. Also, the bank remains well-positioned to gain once the economy starts rising. Investors should note that higher provisions could weigh on its bottom line in the near-term. However, RY follows prudent risk management and underwriting procedures. Notably, RY stock has historically traded at a premium, when compared to its peers. The bank’s premium valuation seems justified, given the consistent growth in loans and deposits, solid risk management practices, and healthy dividend yield. We have valued the stock using Price to Book based relative valuation method with a target multiple of 1.7x and arrived at a target price which implies a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on RY stock at the closing market price of CAD 84.88 per share on May 5, 2020.

RY One-Year Daily Price Chart (Source: Thomson Reuters).

Suncor Energy

Attractive Yield Despite Dividend Cut: Suncor Energy (TSX: SU) is a leading integrated energy company involved in the entire value chain including the digging of oil to refining and selling it. Suncor operates through three business segments including, Oil Sands, Exploration and Production (E&P), and Refining and Marketing.

The company, on May 5, announced a 55% reduction in its quarterly cash dividend to CAD 0.21 per share from CAD 0.465. Though the dividend cut is no good news, it is important for the company to boost liquidity in the current economic scenario. With the cut in dividend, Suncor’s annual yield now stands at 3.6%, which still looks attractive.

Q12020 financial highlights: On May 5, Suncor posted weak first quarter results. The company posted operating loss of CAD 309 million in the first quarter, as compared to the operating earnings of CAD 1.209 billion in the prior year quarter. A significant decline in oil prices following lower demand and increased supply took a toll on the company’s performance.  Suncor reported a net loss of CAD 3.525 billion in the first quarter, as compared to the net earnings of CAD 1.470 billion in the prior year quarter. Funds from operations came in at CAD 1.001 billion, as compared to CAD 2.585 billion in the prior year quarter. Cash flow provided by operating activities was CAD 1.384 billion, down from CAD 1.548 billion in the first quarter of 2019.

Q12020 Financial Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  EV/EBITDA Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock recommendation: We believe the significant decline in oil prices and demand supply imbalance is likely to take some time before coming back to normal. We expect Suncor’s business to remain challenged in the near-term. However, long-term investors shouldn’t worry much as Suncor has ample liquidity to survive the current crisis. The company is cutting back on cost and capex and focusing on maximising price realizations by shifting its upstream product mix towards higher priced light crude. We have valued the stock using the EV/EBITDA based relative valuation method. We have taken peers like Imperial Oil Ltd. (TSX: IMO), Canadian Natural Resources Ltd. (TSX: CNQ), Huskey Energy Inc (TSX: HSE) etc. and arrived at a target price of lower-double digit upside (in% terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 23.28 per share on May 5, 2020.

SU One-Year Daily Price Chart (Source: Thomson Reuters).

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.