Is ATCO the Perfect Stock?

It’s time to write about some of the other stocks covered on NAVInformation.com, such as the Pipelines, Utilities and Service Companies.  In this post we will look at ATCO, one of the best stocks that isn’t mentioned often in business media.  What are some of the characteristics of this stock that make it attractive to own?  It has a great long-term track record of growing share price and dividends, and still trades at a reasonable valuation.  Some of the other utility stocks are overvalued, or haven’t provided much in growth over the last 10-15 years.  First let’s go over what is ATCO the company.

Company Description

ATCO is an Alberta based diversified utility company that has three main business lines, structures and logistics, electricity and pipelines and liquids.  The three business lines allow the company to diversify its sources of revenue and possibly select the best business to allocate capital toward.

ATCO Group of Companies, ATCO investor presentation

The ownership of the company is slightly complicated by its partial ownership of Canadian Utilities and direct ownership of the structures and logistics part of the business.

ATCO Corporate Structure, ATCO investor presentation

The part that Canadian Utilities plays in the corporate structure, from my point of view, is to allow a higher dividend yield for dividend investors than ATCO itself.  ATCO has a record of increasing its dividend every year since 1993.  If you purchased the stock in 2000, the dividend yield itself would be over 11% on the original purchase price.  If you want to know more I suggest you go to their website and look over their investor presentation.

Historical Performance

This chart shows the performance of ATCO from 2000 to the present compared to Enbridge, Royal Bank and Suncor.  These are all blue chip companies with significant assets and they all pay a dividend.  The chart is of the TOTAL return including the dividend allowing you to compare what you as an investor may have made in your RRSP or investment account if you owned it from that point in time to today.  As you can see ATCO would have returned you 14 times your original investment, Enbridge 18 times, Royal Bank 11 times and Suncor pulling up the rear at only 6 times.  Why aren’t we profiling Enbridge as the perfect stock?  If you jump to the Data Tables, you can see ATCO still has significant upside(according to my discounted cash flow model 43%), much more than Enbridge(-14%).  I think Enbridge is also a good stock to own, but at this point in time not as good as ATCO in that there is more upside to your investment.  Another point for ATCO is the debt/cash flow(ATCO 5.4) is much lower than for Enbridge(7.7).  Enbridge has used more debt over the last 10 years than ATCO to grow its business and earnings.  This is a good strategy when interest rates are low, it just has more risk of negative returns during a rising interest rate environment.

If you think back to when this chart started this period of time was the end of the tech bubble and utility and pipelines stocks were discarded as investors madly purchased anything tech and internet.  Back then ATCO traded at 9 times forward earnings which would have been a small fraction of Microsoft or Yahoo or Cisco.  I don’t think anyone would have expected that your investment return from purchasing ATCO would have been much better over the next 16 years than what Microsoft delivered.  From this point forward ATCO probably will not give you a 14 bagger return, since part of the return was the rearating of the valuation from 9 times to 14 times forward earnings and the addition of more debt.

As a side note these three stocks have also outperformed the TSX Index of stocks that trade on the Toronto Stock Exchange, which would have multiplied your money by 3.3 times over that time frame.

Book Value and Cash Flow per Share

What drove the returns over those 16 years to provide the excellent stock returns?  One of the things that likely won’t be repeated is the re-rating of the valuation from 9 to 14 times forward earnings.  The other item that would be repeated with good management, is the cash flow per share and book value per share growth.

ATCO, Cash Flow per Share, NAVInformation.com

ATCO, Book Value per Share, NAVInformation.com

These charts were derived from the yearly financial statements.  The book value excludes good will so it is more weighted to tangible items(of course less net debt).  The charts show the consistent and regular compounding of cash flow per share and book value per share that good companies with real assets can show.  This is analogous to the energy companies that can consistently show per share reserve growth and per share production growth year in and year out, good stocks to own.  If ATCO can compound their cash flow and book value at 8% a year, over time the value of the stock will grow.  Combined with the dividend yield of 2.5% you could expect a 10% return over the long run, much better than mediocre bond yields today of 2%.

So there you have it a nice stock with a good long-term track record trading at a reasonable valuation.  The business is understandable in that they earn money from a network of gas pipelines, power lines, power generating plants and a structures and logistics business.  These are all business lines that should be around 5 or 10 or 20 years from now.  Historically ATCO’s stock has soundly outperformed the TSX Index, all while investing in boring stable cash flow business lines such as power lines, pipelines and power plants.  ATCO is not the perfect stock but it definitely is one that should be considered when purchasing a stock for your investment portfolio.

Of course as always consult with a qualified financial advisor before making any investment decision or purchasing any stock.