What are we looking for?
Canadian utility companies with consistent dividend growth that stand to gain from a low-interest rate environment.
The screen
Last month, the Bank of Canada announced a rate cut of a half-percentage-point – double the quarter-point reduction in September. This fourth consecutive cut has increased expectations for rates to continue to fall in 2025. Major Canadian banks like CIBC and RBC anticipate another half-point cut in December, with further forecasts suggesting rates could fall to between 2 per cent and 2.25 per cent by the middle of next year. If interest rates drop as predicted, bonds yields will decline and investors seeking an alternative source of returns may consider the utilities sector. This is owing in part to the sector’s consistent dividends and general resilience during economic downturns.
We identified utility companies that stand to benefit from future rate cuts in Canada using FactSet’s universal screening tool and applying the following parameters:
- Traded on a Canadian exchange
- Market capitalization greater than $1-billion
- Classified in the “Utilities” sector according to FactSet
- Dividend yield greater than 3.5 per cent
- Year-over-year dividend increases since 2020, and projected dividend increases in 2024, according to analysts’ estimates
We ranked the remaining companies on three factors: debt-to-asset ratio, variable debt as a percentage of total debt, and interest coverage ratio. Companies with a lower debt-to-asset ratio are better positioned during uncertain interest rate environments as they have a smaller proportion of assets financed by liabilities. Additionally, companies with a higher proportion of variable debt to total debt will benefit the most from continuing rate cuts, as their interest payments will decrease. Lastly, companies with high interest coverage ratios are more favourable as they demonstrate a greater capacity to meet interest obligations while maintaining liquidity.
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What we found
The top two utility companies passing our criteria are highlighted below:
Capital Power Corp. CPX-T, a power generation company, ranked first in our screen with a debt-to-asset ratio of 0.4 and an interest coverage ratio of 2.3. The company specializes in the development, acquisition, and operation of different energy sources, including renewable and thermal power facilities. Compared with other utility companies in our screen, Capital Power had the second highest proportion of variable debt to its total debt, at 13.1 per cent. The company released third-quarter earnings on Oct. 30 and beat analysts’ expectations, reporting $401-million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Capital Power attributed this success to the significant contributions of newly acquired assets in the United States.
ATCO Ltd. ACO-X-T, a diversified utility company, ranked second in our screen with a debt-to-asset ratio of 0.4 and an interest coverage ratio of 2.2. The company’s subsidiaries span electric utilities, natural gas production and distribution, and construction. Among the companies passing our criteria, ATCO had the highest proportion of variable debt to its total debt, at 13.7 per cent. During ATCO’s second-quarter earnings call in August, management said they anticipated a “small dip in activity in Q3.″ Investors keen to see if this materializes into an impact on performance can tune in to this week’s third-quarter earnings call on Nov. 14 for more insights.
Disclaimer: The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Christine Elegado is a consultant at FactSet Canada.