Let's Dive into Canadian Utilities Stock (CU)

When it comes to steady dividends and defensive plays, Canadian Utilities Limited (TSX:CU) often pops up on the radar of income-focused investors.

But does this utility stock still have the juice to power your portfolio in 2025?

Let’s break it down with a little help from the charts.

A Utility Giant with Staying Power

Canadian Utilities is part of the ATCO group and operates in electricity, pipelines, and energy infrastructure. With its diverse and regulated business model, the company’s earnings are as predictable as a thermostat set to 22 degrees. But while stability is a given, the real question is whether CU’s stock offers value and growth potential at current levels.

Canadian Utilities also stands out for its strategic initiatives. Over the years, the company has been investing in renewable energy projects, including wind, solar, and battery storage facilities. These efforts are aimed at future-proofing the business against the ongoing energy transition.

While these projects represent only a small portion of its overall portfolio, they signal a commitment to adapting to changing industry dynamics.

Dividend Dependability

First, the good news: Canadian Utilities holds the crown for the longest streak of annual dividend increases among Canadian companies. With 51 consecutive years of hikes, CU is the king of dividend aristocrats in Canada. The current yield hovers around 5.5%, which is higher than the average utility stock.

For income-seekers, this is hard to ignore.

That said, the dividend payout ratio has crept higher, sitting above 90% of earnings. This isn’t alarming for a utility company, but it does limit flexibility for future increases unless earnings grow. The company’s ability to maintain such a streak in a challenging macroeconomic environment speaks volumes about its financial discipline and focus on shareholder returns.

Financial Health Check

The company reported Q3 2024 adjusted earnings of $0.49 per share, down slightly from $0.51 in the same quarter last year. Rising interest expenses are putting a squeeze on margins, as is the case for many utility companies facing higher borrowing costs. Net debt levels have risen as well, reflecting the capital-intensive nature of utilities and their reliance on borrowing for infrastructure projects.

On the balance sheet, Canadian Utilities maintains a debt-to-equity ratio of approximately 1.4, which is slightly above the industry average. While this leverage level isn’t uncommon for utilities, it highlights the importance of stable cash flows to meet debt obligations. Free cash flow for the trailing twelve months stood at a modest $100 million, reflecting the high reinvestment needs of the business.

Despite these pressures, CU’s regulated earnings base provides a strong defensive moat. The company’s steady cash flows are bolstered by long-term contracts and regulated rates, which insulate it from significant revenue volatility.

Revenues for the first nine months of 2024 reached $2.5 billion, marking a 3% year-over-year increase. This growth was primarily driven by higher rate base earnings from its regulated utilities, offset partially by lower contributions from its energy infrastructure division. Operating margins, however, have faced slight compression due to inflationary pressures and rising borrowing costs.

Additionally, CU is pursuing growth projects in renewable energy, including solar and battery storage, which could diversify its revenue streams over the long term.

Technical Analysis: What the Charts Say

Now, let’s get technical. Canadian Utilities’ stock has been trading in a downward channel for much of the past year, reflecting broader market sentiment toward interest-rate-sensitive sectors.

The stock is up 7.89% but has underperformed the S&P 500 by 16.84% year-to-date.

Key Levels to Watch

• Support: The stock recently found support around the $29.50 level, a zone it’s tested multiple times since late 2022. If this level holds, it could act as a springboard for a recovery.
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• Resistance: The first major resistance lies at $32.00, aligning with the 50-day moving average. A breakout above this could signal a trend reversal.
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• Moving Averages: CU is trading below both its 50-day and 200-day moving averages, a bearish signal. However, a narrowing gap between these averages suggests that momentum might be stabilizing.
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• Relative Strength Index (RSI): The RSI is hovering around 40, indicating the stock is neither oversold nor overbought. A dip below 30 could create a buying opportunity for value hunters.

Volume Trends

Recent trading volumes have been light, signaling a lack of strong conviction from either bulls or bears. A spike in volume accompanying a breakout (or breakdown) could confirm the next directional move.

Long-Term Chart Pattern

Zooming out to the five-year chart, CU has largely traded in a range between $28 and $40, except for a brief dip during the COVID-19 market crash. This suggests that the stock has a history of rebounding strongly from its lower range. Investors with a long-term horizon may find the current price levels attractive for accumulation.

The Macro Picture

Interest rates are a major headwind for utilities, and the Bank of Canada’s policy decisions in 2025 will significantly influence CU’s trajectory. Higher rates increase borrowing costs and make fixed-income alternatives more attractive compared to dividend-paying stocks.

Investors need to weigh this macroeconomic backdrop when considering an entry point.

At the same time, the shift toward green energy and decarbonization efforts could provide a tailwind for Canadian Utilities. Governments and corporations are increasingly prioritizing sustainable energy, and CU’s investments in renewables position it to benefit from this trend over the long term.

Comparing CU to Peers

Compared to its Canadian peers such as Fortis (TSX:FTS) and Emera (TSX:EMA), Canadian Utilities offers a higher dividend yield but has underperformed in terms of share price growth. Fortis, for instance, has demonstrated better total return performance, but CU’s valuation metrics suggest it could be undervalued relative to peers. The price-to-earnings (P/E) ratio of CU stands at around 16, slightly below the industry average, which could attract value investors.

The Verdict: A Mixed Bag

Canadian Utilities offers stability, income, and a solid track record, but its growth potential looks limited in the near term. For income investors, the 5.5% yield is compelling, especially if you’re confident that the dividend is safe.

However, those looking for capital appreciation might want to wait for clearer signs of a technical breakout or a more favorable interest rate environment.

For long-term investors, CU could serve as a cornerstone of a diversified, income-focused portfolio. However, those seeking short-term gains or growth might find better opportunities elsewhere.

If you’re holding CU, it’s likely for the dividends—and they’re not going anywhere. But if you’re thinking of buying, keep an eye on that $29.50 support level and watch for catalysts that could shake the stock out of its current range.