Dividend Stock Analysis: Atco Ltd (TSE: ACO.X)

Stock Analysis

Good evening readers,

Ever since I started these dividend stock analyses I’ve felt like I’ve learned quite a bit about reading and understanding different stock metrics. Like my blog title, I am a dividend beginner, and I’ve decided to open up my entire journey here for others to see, read about, and hopefully inspire.

As I begin to analyse stocks more thoroughly instead of simply watching and reading about what others may be doing, nodding my head in agreement, and throwing money into companies – I’ve come to realize It’s not a bad thing to have cash lying around, waiting for the perfect investment to come along rather than investing in a series of companies that will do average or a bit better.

The price point at which you enter a company is important. It determines how much appreciation you may muster, and how much difficulty the stock may have in pushing the price higher, so looking for value in the stock price is intelligent – unless you want to be an enterprising (growth) investor, in which I’m definitely not the guy to tell you about, as I’m not interested so much in capital appreciation – where one month you can be rich and the next month poor; unlike with the uncertainty of capital appreciation, dividends paid are cash in your pockets; not a fluctuating digit.

About Atco Ltd

Today I’m here to talk a bit about the company Atco Ltd (TSE: ACO.X), the third utility stock with 10+ years of increasing dividends I’m analyzing from the Canadian Dividends All-Star List (see an analysis of Canadian Utilities (TSE: CU) and TransCanada Corp (TSE: TRP)).

Atco Ltd is described as “a Canada-based company. It is engaged in structures and logistics, utilities, and energy, and delivers business solutions. The Company’s segments are Structures & Logistics, Utilities, Energy, ATCO Australia. The Structures & Logistics segment manufactures, sells and leases housing and space rental products; delivers operations and maintenance services, and provides lodging, catering, waste management and maintenance services, ” according to CIBC Investor’s Edge.

Valuation

The stock price last closed at $44.81 on may 15th, 2015. Atco Ltd is trading at an incredibly attractive price compared to it’s 52 week range; currently it’s trading up only 3.32% off it’s 52-week low of $43.37; and 16.26% below it’s 52-week high of $53.51. I’m hoping it shoots below it’s 52-week low so that I can pick up some shares. It is trading at a P/E (TTM) of only 13.4, while the 5-Yr average is 13.2, and I believe the price still has some room to drop considering it missed earnings estimate in the first quarter by a whopping -23.16%.

Thomson Reuters has a 12-month mean price target of $49.00 on the stock, which would represent a 10.8% stock price appreciation. They also have a 12-month high price target of $59.00, and a low of $46.00. Currently they’ve set a Hold rating on ACO.X, which leans slightly closer to the Sell side. What I find very attractive here is that the low 12-month expected price is still higher than the current price ACO.X is trading at, which is always a good sign. While this company may find itself in a bit of trouble due to crude oil prices facing uncertainty in the short term, the fundamentals of Atco are solid and I believe in the company. If it got to the point where everyone was selling and the price would shoot down, I’d be interested in picking up some of those shares once they’re near bottoming out.

Dividend

Atco Ltd currently yields a dividend of 2.21%, which is nothing incredible considering it’s below 2.5% which lowers my interest a bit; especially when compared to REITs which can yield up to 8% safely. However, in time, ACO.x will beat that 8% dividend as you’ll soon find out. The average 5-year yield average is 1.82%, and with ACO.X’s current 2.21% yield, it appears as though the stock is trading at a nice discount in relation to average dividend yield. ACO.X has increased dividend payments for 22 years straight. This company has been paying shareholders more money, year after year, since before I was born. The annual dividend payment of $0.99 only represents a 26.61% payout ratio, meaning the dividend is incredibly safe and has a ton of room to grow.

As I’ve started analyzing more companies in hopes of finding the best ones to invest in for the best prices, there is one often overlooked metric which puts ACO.X a little above many other general stocks: the dividend growth rate.

ACO.X has a 5-year dividend growth rate of 8.7%, and an incredibly attractive 10-year dividend growth rate of 14.57%. If we use the 10-year yield growth rate of 14.57%, and if we were to purchase shares yielding 2.21%, then in 10 years we can expect a YOC (yield-on-cost: the dividend yield you will receive based on your current cost) of 8.73%! To put this into perspective, if you were to invest $10, 000 in ACO.X TODAY and receive a 2.21% yield, you would earn $221 / year in dividends. However, if you held onto these shares, after 10 years, you would earn $873 / year by doing nothing, and simply by having held your ACO.X shares. (None of these calculations take any capital appreciation into account; we’re only looking at dividends!) Now I don’t know about you, but $873 / year for an investment made 10 years ago – and having done nothing since then, sounds pretty sweet to me. This 10-year YOC would amount to an average of $72.75 / month.

Conclusion

Atco Ltd is a very solid utility investment which yields a dividend of 2.21%, with a fantastic 10-year dividend growth rate of 14.57%, and a 22 year track record of increasing dividends consistently. They currently boast an incredibly efficient payout ratio of 26.61%. There’s no doubt that this is a company you can hold for a long, long time and reap the rewards as you age; receiving more and more cash year after year. While Atco Ltd currently trades at $44.81, it is very close tor it’s 52-week low of $43.94; and I would love to own shares in the company if the price were to drop to around $42.50 or (of course) lower.

NOTE on Atco Ltd VS Canadian Utilities Ltd

While Canadian Utilities (TSE: CU) is also a great utility stock to own, it is an Atco company, so by buying Atco you also possess an investment in CU. Something to note is that Atco is cheaper than CU with a P/E of 13.4 as opposed to 15.8. While CU yields a chunkier 3.21% yield, the stock also has a smaller 10-year yield growth rate of 7.3%. If we look 10 years into the future, taking these current yields and 10-year yield growth into account,

ACO.X will have a 10 Year YOC of 8.73%

CU will have a 10 Year YOC of 6.49%

From this we can determine that, based on current yields and past growth rates, that Atco Ltd will yield a far better YOC dividend than CU will; but for now, CU pays a nicer yield for a slightly more expensive price. Of course, no one’s stopping anyone from owning both stocks, but Atco Ltd will provide the investor with a higher level of diversification.

Dividend Beginner

A 22 year old Canadian dividend growth investor striving for early financial independence; building as many passive income streams as early as possible.
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  • The issue here is that free cash flow is deficient and has been deficient going back to 2008 (with the exception of +tive fcf in 09). The business is highly capital intensive & fcf gets eaten up by ongoing capx, which limits the potential for future dividend growth at anywhere near 14%. They’ve bridged the gap in fcf by issuing debt to finance the capx, but at debt/equity of 2.2x, the bondholders have first priority given the scale of debt & the equity holders are secondary.

    In terms of P/E, unless they can raise prices significantly on their services (unlikely as this is a conglomerate of regulated utility businesses), where’s the P/E multiple expansion going to come from? Historically, it’s traded at between 9 and 13.5, so right now, it’s at the high end of the range.

    Pass.

    • Hi Dan,

      Interesting mention on the lack of cash flow. I’ll definitely take a harder look at their debt before investing; the price has been dropping consistently recently, which does pique my interest.

      Concerning the P/E, the 5-year average P/E ratio for ACO.X is 12.5, and it’s currently about the same right now at 12.7, so it’s about average. However, the forward P/E is high in relation to this. With such a low payout ratio I still believe they can hike their dividends at a comfortable pace.

      Best Regards,
      Dividend Beginner

      • Have a look at the BMO covered calls utilities ETF (ZWU) on the TSX, it’s diversified enough not to have significant concentration risk in any one utility (it actually holds all the Cdn telcos, US telcos, Cdn pipelines, certain US utilities, and a smattering of Cdn utilities). I think it achieves the purpose of generating constant yield (albeit somewhat variable b/c the yield is augmented by the sale of call options against the holdings). Disclosure, I own it in my RRSP. With Atco the debt scares me. Like your blog by the way!

        • Dan,

          Thanks so much for mentioning ZWU, I’ll have a look at it. Definitely liking the near 6% yield as an income investor. Hope to see you around here as my portfolio grows!

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My publishings on dividendbeginner.com references an opinion and is for information or entertainment purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. I am not responsible for any decisions you make concerning finances, taxes, or investments. You must perform your own research and always take caution when extending capital.