ATCO Ltd

Sound bite for Twitter and StockTwits is: Dividend Growth Utility. The stock price would seem to reasonable. A vulnerability is the high leverage of this company. See my spreadsheet on ATCO Ltd.

I do not own this stock of ATCO Ltd (TSX-ACO.X, OTC-ACLLF). I started to look at this stock in 2009 because it was a dividend paying stock that was on everyone’s list. At that time this stock was on the Dividend Achievers list, the Dividend Aristocrats list and also was on Mike Higgs’ list. ATCO (TSX-ACO-X) owns 88% Canadian Utilities (TSX-CU, so you would not buy both these stocks.

When I was updating my spreadsheet, I noticed that estimates for Revenue and EPS was not very accurate. The Revenue estimate for 2018 was $4,348M and it came in at $4,888. The estimate for EPS for 2018 was $3.12 and this came in at $2.86. I use estimate as stock prices are based on what analysts currently think of a stock which is reflected in the estimates. It is the best guesses available.

Dividend yield is in the moderate range (2 to 4% ranges). The current dividend is higher than the others I look at. It is currently at 3.40%. The 5, 10 and historical median dividend yields are 2.71%, 2.20% and 2.13%. Dividends have grown over the years at a moderate rate (8% to 14% range). See the chart below

The Dividend Payout Ratios are good. The DPR for EPS for 2018 was 53% with 5 year coverage at 46%. The DPR for CFPS for 2018 is 9% with 5 year coverage at 7%.

Debt Ratios are a vulnerability, especially the Long Term Debt/Market Cap Ratio. The Long Term Debt/Market Cap Ratio is high in 2018 at 2.32 and still high today at 1.61. Interestedly the balance shows Property, Plant and Equipment with a higher value than the Long Term Debt. It would seem that the market does not value these assets on the balance very highly. The Property, Plant and Equipment/Long Term debt Ratio is 0.58. This means the assets are showing as valued higher than the Long Term Debt. I would see this as a vulnerability.

The Liquidity Ratio for 2018 is 1.20. If you add in cash flow after dividends, it is 1.67. The Debt Ratio is 1.47 and this is ok, but I prefer it to be at 1.50 or higher. The Leverage and Debt/Equity Ratios are a bit high at 3.14 and 2.14.

The Total Return per year is shown below for years of 5 to 25 to the end of 2018. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.

From	Years	Div. Gth	Tot Ret	Cap Gain	Div.
2013	5	14.97%	-1.03%	-3.72%	2.69%
2008	10	12.35%	10.50%	7.35%	3.15%
2003	15	10.88%	11.37%	8.21%	3.16%
1998	20	11.53%	9.99%	7.23%	2.76%
1993	25	13.76%	14.35%	10.67%	3.68%

The 5 year low, median, and high median Price/Earnings per Share Ratios are 12.29, 14.12 and 16.69. The corresponding 10 year ratios are 11.30, 13.01 and 14.45. The corresponding historical ratios are 9.68, 10.75 and 12.42. The current P/E Ratio is 14.96 based on a stock price of $47.58 and 2018 EPS of $3.18. This stock price testing suggests that the stock price is relatively expensive.

For the better returns that for the last 5 years where the P/E Ratio started at 12.89, the starting P/E for years 10, 15, 20 and 25 were 8.15, 10.92, 12.92 and 7.80. When the start P/E was 12.92, the return was the lowest at 9.99% per year. This is just another way of looking at P/E Ratios.

I get a Graham Price of $48.86. The 10 year low, median, and high median Price/Graham Price Ratios are 0.78, 0.91 and 1.07. The current P/GP Ratio is 0.97 based on a stock price of $47.58. This stock price testing suggests that the stock price is relatively reasonable but above the median.

I get a 10 year median Price/Book Value per Share Ratio of 1.48. The current P/B Ratio is 1.43 based on a Book Value of $3,825M, Book Value per Share of $33.36 and a stock price of $47.58. The current ratio is 4% below the 10 year median ratio. This stock price testing suggests that the stock price is relatively reasonable and below the median.

I get an historical median dividend yield of 2.13%. The current dividend yield is 3.40% based on dividends of $1.62 and a stock price of $47.58. The current dividend yield is 60% above the historical one. This stock price testing suggests that the stock price is relatively cheap.

The 10 year median Price/Sales (Revenue) Ratio is 1.05. The current P/S Ratio is 1.50 based on 2018 Revenue estimate of $5,198M, Revenue per Share of $45.33 and a stock price of $47.58. The ratios are the same. This stock price testing suggests that the stock price is relatively reasonable and at the median.

Results of stock price testing is that the stock price is probably reasonable. Last year the 12 month revenue to the end of the second quarter was already $4,964 when analysts were giving an estimate of 4,348M and it came in at $4,888. This year the 12 month Revenue to the end of the second quarter is $4,712 and the estimate is $5,198. The estimate maybe more reasonable this year. The P/S Ratio testing shows that the stock is reasonable.

On a number of levels, the P/E Ratio is showing the stock price as relatively high. The dividend yield shows that the stock price is cheap, but the dividends are going up faster than the earnings. The P/B Ratio test is probably a good one and the current ratio is just 4% lower than the 10 year ratio.

Is it a good company at a reasonable price? I would worry about the high level of leverage of this company, especially when we hit the next recession. However, utility companies are usually highly leveraged. It will probably do fine. The price seems reasonable. Analysts expect earnings growth in the future, and the last dividend increase was lower at just 7.5%.

When I look at analysts’ recommendations, I find Strong Buy (2), Buy (1) and Hold (4). The consensus would be a Buy. The 12 month stock price is $49.79. This implies a total return of $8.05%with 4.64% from capital gains and 3.40% from dividends.

See what analysts are saying on Stock Chase. It is called a defensive stock. Amy Legate-Wolfe on Motley Fool thinks the price is cheap and the stock has lots of upside. A writer on Simply Wall Street says the dividends are not covered by free cash flow. A writer on Simply Wall Street says that the company is highly leveraged because debt levels exceed equity. Geoffrey Morgan on London Free Press talks about this company getting involved with carbon capture.

Atco Ltd is a Canadian holding company that offers gas, electric, and infrastructure solutions. The largest subsidiary of the company is Canadian utilities, which operates natural gas, electricity, and logistical services. Atco's primary segments include electricity (generation, transmission, and distribution), pipelines and liquid, Neltume Ports and Structures and logistics. Its web site is here ATCO Ltd.

The last stock I wrote about was about was Exchange Income Corp (TSX-EIF, OTC-EIFZF) ... learn more. The next stock I will write about will be High Liner Foods (TSX-HLF, OTC-HLNFF) ... learn more on Wednesday, September 04, 2019 around 5 pm. Today on my other blog I will write about Dividend Stocks September 2019.... learn more on Tuesday, September 3, 2019 around 5 pm.

This blog is meant for educational purposes only and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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