What are we looking for?
Well-valued Canadian utilities stocks that may be poised for intermediate-term price appreciation.
So far, 2015 has been a mixed year for the Canadian markets with energy, financials and materials stocks leading the way. All of these sectors have indexes that are above their 50-day simple moving averages, or SMAs. (The 50-day moving average is the sum of the closing prices of the index over the past 50 trading days, divided by 50.)
A number of other sectors have lagged this year with health care, consumer discretionary, consumer staples and utilities all below their 50-day SMAs. Of these underperforming sectors, the utilities sector is currently sitting the furthest below its 50-day SMA. Reversion to mean trading strategies would suggest that the utilities may outperform other sectors in the intermediate term.
The screen
We will be using Recognia Strategy Builder to search for Canadian utilities stocks with manageable debt levels, good dividend yields and reasonable forward valuations.
We begin by setting a minimum market cap threshold of $1-billion. Strong and stable dividend yields are one of the significant attractions of utilities stocks. Therefore, we will screen for stocks with dividend yields of at least 2.5 per cent.
We also wish to ensure we stay away from companies with excessive debt. We will focus on companies with debt-to-equity ratios of 1.5 or less.
Finally, to ensure we don't overpay for our investments, we will screen for companies with reasonable forward price-to-earnings ratios based on analyst estimates. We will select only companies with forward P/E ratios of 30 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Capital Power Corp. is an independent power generator based in Edmonton. The company ranks No. 1 on our list with a strong dividend yield of 5.4 per cent, low debt-to-equity ratio of 0.63 and a reasonable forward P/E ratio of 19.4. The stock has struggled in 2015 and is down 3.8 per cent, year to date.
TransAlta Renewables has the highest dividend yield on our screen at 7 per cent. The company operates more than 28 renewable energy installations in British Columbia, Alberta, Ontario, Quebec and New Brunswick, and is Canada's largest generator of wind power. The company has a low debt-to-equity ratio of 0.67 but is fairly richly valued with a forward P/E ratio of 26.3.
Newfoundland-based Fortis Inc. has electric utility operations in Canada, the United States, Central America and the Caribbean. Fortis is the largest company on our list with a market cap of $10.6-billion. The company is attractive with its 3.5-per-cent dividend yield and reasonable forward P/E ratio of 19.3. Unlike many utilities whose stock prices have struggled, Fortis shares have seen a 19.4-per-cent increase in the past 12 months.
Historical performance
Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had an 11.2-per-cent annualized return compared to 4.6 per cent for the S&P/TSX 60 and 4.8 per cent for the S&P/TSX composite index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.