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Not All Dividend Stocks Are Created Equal

The oil shock’s hit to the Canadian economy may be front-loaded toward the first half of the year, but as the latest earnings season shows the resource space is still taking it on the chin.

At this point, nearly 82% of the 242 companies on the S&P/TSX Composite Index have reported earnings. Thus far, sales have declined 7.5% year over year, while earnings have plummeted almost 41% over that same period.

Fortunately, there’s no sea of red when you drill down to individual sectors. Instead, the vast majority of the carnage is confined to the energy and materials sectors.

Since we already know that story all too well, let’s dig into some of the sectors that are seeing strong growth on the sales and earnings fronts.

With results in for 11 out of 12 companies in the sector, utilities have delivered sales growth of 8.6%, while earnings have jumped nearly 40%.

Fortis Inc. (TSX: FTS, OTC: FRTSF), which is one of our favorite utilities, had another blockbuster quarter. Sales were up 31% year over year, to CAD1.6 billion, while adjusted earnings per share more than doubled, to CAD0.52.

The single biggest factor in this performance was the Canadian utility giant’s acquisition of Arizona-based UNS Energy Corp. last year. The deal closed in mid-August 2014, so the year-ago period’s results didn’t include a full-quarter contribution from UNS.

Additionally, UNS’ performance is highly seasonal, with the second and third quarters typically accounting for 75% of the firm’s full-year earnings.

While we’re certainly enjoying the boost to earnings, it’s important to note that Fortis will face tougher comparables in future quarters, since the fourth quarter of last year was the first full quarter in which UNS was part of the Fortis empire.

Also worth mentioning is the fact that the UNS acquisition along with recent divestitures is helping Fortis inch ever closer to becoming a fully regulated utility. In the latest quarter, regulated revenue came in at 95.2% of total revenue, a 1.5 percentage point improvement from a year ago.

At the same time, the company’s non-regulated businesses are still an important contributor to the bottom line. They delivered 17.4% of profits, up from 12.4% a year ago.

With a forward yield of around 4%, there’s still more to come. Cash flows from Fortis’ regulated operations will flow through to the dividend. While the company’s payout has grown 3.7% annually over the past five years, management is now projecting the dividend will grow 6% annually through 2020.

We have much more on Fortis in the latest issue.

The telecom sector also had another very respectable quarter. Of course, it helps that the country’s Big Three essentially operate as an oligopoly.

Among our favorite stocks in the sector, BCE Inc. (TSX: BCE, NYSE: BCE) saw adjusted earnings per share rise 12% year over year, to CAD0.93, on sales growth of 3%, to CAD5.4 billion.

BCE was the big winner in net postpaid wireless customer growth, with 78,000 new subscribers, narrowly beating Rogers Communications Inc. (NYSE: RCI, TSX: RCI).

While sales growth in an oligopoly isn’t always all that spectacular, the margins from high-value smartphone customers lead to decent profits. Analysts expect BCE to grow earnings 5.2% annually over the next two years.

The company has increased its payout 8.2% annually over the past five years, and more cash is on the way. Analysts forecast BCE’s dividend will rise 4.5% annually through 2017. BCE has a forward yield of 4.6%.

Despite the challenges facing Canada’s economy and its resource space, our selective approach to high-quality dividend stocks is still grinding out winners.


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