I often receive email from readers asking what I think about a specific stock or an industry. I usually try to analyse these companies in the upcoming month as I think that it could be interesting for most of you to have a deeper look into these stocks.
About 2 weeks ago, I received an email from Russ. He asked me why he couldn’t find many stock analyses on 2 high dividend paying utility stocks. I thought his question was quite interesting as they were indeed paying a good dividend yield. I didn’t know either of the companies so I was a bit intrigued (we are all looking to make a good trade on a new stock, right?). So, I ran my program to generate the dividend metrics I usually use to analyse a stock. And this is when I realized why I hadn’t noticed these 2 companies before…
More Info on the Utility Sector
At first glance, the utility sector seems very appealing for dividend investors. Most companies are offering high dividend yields (4-5% seems to be the average for several sub-sectors) while showing a stable business model. The demand is relatively predictable, the competition is known and the whole industry is moving together in many cases. Water and Electric companies seem to be the most popular dividend payers while there are more oil related utility stocks in Canada. In both countries, the metrics of this sector is perfect for someone who’s looking for a high yield and steady dividend stocks. You obviously can’t seek huge growth but if you can secure the dividend payout, I guess that one can find it very suitable for his portfolio (especially if you are retired!).
Why Dividend Yield Should Not Be A Decision Factor
When I first read that email, there is one thing that caught my attention; the mention of the dividend yield for both companies. Here’s the email I received:
“Just wondering, why aren’t utility stocks like Just Energy (JE with a 8.9%
yield) and Atlantic Power (ATP with a 8.3% yield) aren’t on many lists of
people’s favorite dividend stocks? »
I don’t mean to put Russ in the spotlight because I receive this kind of email on a regular basis. In fact, it is a common mistake to start with the dividend yield. The problem that exists when you start your research with this metric is that you are thinking about the payout before trying to know if it’s sustainable or not. If an investor starts thinking about money, he forgets about his rational stock analysis process.
You look at a high dividend yield sector and find higher dividend payers. This sounds like the jackpot, doesn’t it? This is why you should never start by looking at the dividend yield. This is how you can prevent yourself from being tempted.
Using Several Metrics At The Same Time
When I look for the next stock to add to my portfolio, I start by running a bunch of filters at the same time and look at which stocks come out. The dividend yield is only one factor and I use it to filter a minimum payout (usually 3%) and I don’t class the stocks from the highest dividend yield to the lowest. In fact, revenue growth, dividend payout ratio and dividend growth are a lot more important to me. Before buying a stock, I want to make sure that the dividend yield I receive today will be the smallest yield I will ever get from the stock (meaning it will keep increasing over time).
Back To My Reader’s Question
Russ’s question was regarding ATP and JE. Both are Canadian utility stocks and both pay a very good dividend yield. However, both of them showed losses more than once over the past 5 years and don’t show strong metrics overall. My thoughts? Chances are the dividend yield will continue to increase…because the stock value will probably fall!
If a company posts losses, it means that it is financing its dividend. In other words, both companies have borrowed money or have used equity money to pay their dividend. Does this sound viable to you? For this reason, I’m calling a big “NO GO” on these 2 stocks. Here’s the metric for both stocks:
Ticker ATP CN Equity JE CN Equity
Name Atlantic Power Corp Just Energy Group Inc
Dividend Metrics Current Dividend Yield 8.43 8.89
5 year Dividend Growth 1.28 4.65
1 year Dividend Growth 2.07 0
Company Metrics Sales Growth (1 year) 45.91 28.44
Sales Growth (5 year) 27.94 12.15
Earnings growth #VALUE! #VALUE!
P/E ratio #VALUE! 82
Margins growth -4.04 5.96
Payout ratio #VALUE! 29.45
Return on Equity -5.81 #VALUE!
Debt to Capital Ratio 1.08 0.4
What do you think? Would you go ahead and buy them based on a strong dividend payout?
Disclaimer: I do not hold positions in either of the stocks mentioned above.