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Why utilities could be very useful for patient investors

Investors with a long-term view of the market have every reason to keep calm, says this Canadian advisory — and several reasons to buy.

“Good news and bad news you can deal with. But with uncertainty, you never know what you’re going to be hit with next.”

“Treat the market as it is, not as you expect it to be.”

Those two quotes come from a stock market veteran who has retired from the daily whirl of the exchange, but is still very much in touch with its ups and downs.

He gave his observations, anonymously, to the editor of one of Canada’s leading advisories for income investors, the Money Reporter. You can never have too much sage advice at a time like this.

That advice dovetails very nicely with this advisory’s opinion that investors — conservative investors especially — should be taking a very long view of the market.

In keeping with that perspective, the advisory recommends a selection of stocks that qualify as buys for the long haul. Four of them are in the very steady business of supplying utilities. The other is quite literally in the long haul business.

Far down the road

It may seem obvious, but it bears repeating as far as this advisory is concerned. Long-term investing means just that. Your objectives are far down the road. What happens in the markets in the next few weeks and months doesn’t mean a thing.

If you can afford to wait years to see your objectives achieved, then you have nothing to worry about now. But even if your horizon is not a very long one, say a year or two or three, it still profits you nothing to sell into today’s disjointed market. Impatience is no cure for uncertainty.

One of these days we may find out exactly what the total bill for the credit crunch is going to be. Or how long the U.S. economy, and our own, can be expected to feel the effects. Or whether the overheated Chinese stock market is going to explode. In the meantime, there are many more questions than answers.

Investors have two choices: bail out or stay in. For those who are staying in, you don’t need to just sit tight and hold your breath, either. There are some solid buys to be had, according to the Money Reporter.

Shouldn’t utilities get some love?

If you’re a fairly conservative investor, you have a dilemma these days. Financial stocks and utilities generally form the bedrock of your equity holdings, yet the market has been kicking both of them around. (Of course the market has been putting the boot indiscriminately to stocks of all kinds lately, but it’s bound to kick some around longer than others.)

We know why financial stocks are in detention, but shouldn’t utilities be getting some love in a market like this? Well, yes, says this advisory, which identifies four utilities that should be very useful for investors in the months ahead.

TransCanada Pipeline (TSX-TRP) has finished digesting a large acquisition and should be fit and ready for a strong run. A year ago, TRP issued an enormous flood of shares to help pay for its acquisition of El Paso Corp., a large American owner of pipelines and storage facilities.

The acquisition is now contributing to TransCanada’s earnings — and its earnings per share are no longer being diluted by that huge helping of shares. Fourth quarter profit increased 40 per cent, while net income rose to $0.70 per share from $0.54 per share a year ago.

For the full fiscal year, comparable earnings were up 10 per cent when the final tally came in. This prompted TransCanada to raise its annual dividend to $1.44 from $1.36, which also pushed the yield up to 3.70 per cent from a pallid 1.36.

And there are many more kilometres of pipeline on the way. TransCanada is seeking approval from the Federal Energy Regulation commission in the U.S. to build a natural gas line to the Pacific Northwest and other western states.

“Moreover, TransCanada is the only company that has been cleared by the Alaskan government to build a pipeline up there,” adds the advisory. “We believe that building capacity now is the smart thing to do. TRP is a buy.”

A smoother bottom line

Another utility that has been digesting an acquisition is Fortis Inc. (TSX-FTS), the ever-growing electrical supplier that began life as just plain Newfoundland Power.

A year ago, Fortis repatriated a big natural gas company when it purchased Terasen Gas of British Columbia from U.S. utility giant Kinder Morgan. This did not help Fortis last year. In addition to the cost of acquisition, it got stuck with Terasen’s hefty third-quarter losses.

Terasen generates almost all its earnings in the first and fourth quarter, so it has taken a while to weave this earnings pattern smoothly on to Fortis’ balance sheet. Now the bottom line is beginning to look much better.

“For the longer term,” adds the Money Reporter, “we like the way Fortis quietly keeps building its business via judicious acquisitions over time, and paying a handsome dividend in the meantime. It’s a buy and hold for its current yield and future gains potential.”

Alberta electricity and greenhouse gases

TransAlta Corp. (TSX-TA), Canada’s biggest publicly owned power producer, has been doing better than many of its fellow utilities. If it has taken a dip or two lately, that is strictly the market’s fault.

These are very small blips on a very attractive screen that has seen the stock rise steadily for three years, 17 per cent in the past year alone. Less than a week ago, the company issued record financial results for the fourth quarter and the fiscal year.

TransAlta is getting a boost from Alberta’s growth. It is hardly surprising that electrical output — and the price of electricity — have shot up along with just about everything else in the province. The company is also free and clear of TransAlta Power, the income trust side of the business taken over by Cheung Kong Infrastructure of Hong Kong.

The appeal of the stock doesn’t end there, according to the advisory. “TransAlta also remains a potential takeover target. And Ottawa’s plan to cut greenhouse gases includes provisions that should mean higher margins for TransAlta.”

Last but not quite least on the utility front, there is Nova Scotia power and energy company Emera Inc. (TSX-EMA). It has raised its payout for the second time in six months, reports the advisory.

The annual dividend rate will rise to $0.95 per common share from $0.91. The quarterly rate goes up to $0.2375 from $0.2275 as of the February 15 dividend for shareholders of record on February 1.

Emera is also growing, with the completion of its Northeast Reliability Interconnect transmission line and the construction of its Brunswick Pipeline under way. Buy it for income now and gains later, says the advisory.

One more for the long haul

Finally, there is one more company for the long haul: Canadian National Railway (TSX-CNR). It has just pushed its dividend up, too. Starting with the March 31 payment (to shareholders of record on March 10) it will be 10 per cent higher, at $0.23 per quarter rather than $0.21. That makes 12 consecutive years that CN has raised the dividend.

After a year of uneven results, the railway actually sees things getting brighter. The housing slump in the U.S. has cut down on lumber shipments to the south, of course. But CN doesn’t see that developing into a full recession. In fact, CN foresees revenue growth of 6 to 8 per cent.

It certainly won’t be hurt by its exclusive rail access to the new container port at Prince Rupert, B.C., which cuts several days off shipping time from Asia. The Money Reporter endorses CN’s view of its own future and makes it a buy.

It’s worth remembering that utilities sign long-term contracts. The money keeps coming in.

Income investors might be encouraged to take a similar view. Think of your own investments as a series of long-term contracts. As long as the money keeps coming in, there’s no reason to bail out.