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Some useful advice on investing in utilities

Utilities look relatively safe these days, but not all are created equal, says a Canadian advisory, citing two income trusts and two stocks.

You haven’t turned off the electricity and neither have we. You don’t plan to get through next winter without a furnace and neither do we.

Of course, we haven’t quite gotten through this winter yet, but we’re expecting spring any day now.

At any rate, the point here is not to complain about the weather (even if it is lousy), but to talk about the value of utilities.

Investment analysts are fond of saying that utility companies make boring stocks. They don’t soar up the charts like eagles. They just sit there and get fatter, like pigeons.

But that’s precisely what makes them so useful in times like these. As long as people pay their bills, the companies have steady streams of revenue coming in.

Thus their share prices hold up better than many stocks and their dividend cheques are mailed out regularly.

But utilities are not interchangeable investments. Some are more utilitarian than others, so to speak. And some can even imitate eagles and generate attractive capital gains.

For a survey of several select utilities, we turn to a leading Canadian advisory on income investing, the Money Reporter.

This advisory gives us four different investments — two income trusts and two common stocks. In fact, they cover just three companies, since one of the firms is a two-headed entity.

Money in the bank

We begin with the two-headed company. Enbridge Inc. (TSX-ENB) is the name you see on the side of the vans, if you happen to live in Ontario, Quebec, New Brunswick or New York State and use natural gas.

But the company’s biggest business is pipelines. Enbridge runs the largest crude oil and liquids transportation system in the world. The pipelines crisscross Canada and the Great Lakes region and run deep into the United States.

Both the gas distribution and pipeline business gain stability from long-term contracts. That means prices can’t be raised, but it also means money in the bank.

And the company is making money. For fiscal 2008, it made $1.88 a share (right in line with the Money Reporter’s estimate) over $1.79 a share the year before. It could be as high as $2.32 a share this year. Its dividend is now a substantial $1.48, up from the previous rate of $1.32.

During a very bad year on the Toronto exchange, its share price broke even while the rest of the market fell an average 38 per cent.

It’s a buy for income now and future capital gains, says the advisory.

Prices rising

Then there’s the income trust offshoot. Enbridge Income Fund (TSX-ENF.UN) owns the Canadian half of the Alliance natural gas pipeline system that runs from Fort St. John, B.C. to Chicago. It also owns 100 per cent of the Enbridge Saskatchewan System, which transports crude oil and liquids from Saskatchewan and Manitoba.

It makes money, too. Overall, the fund turned a profit for fiscal 2008 and saw a distribution increase of 11.6 per cent as of the January distribution. The distribution is now $1.15.

This advisory believes oil prices are overly depressed right now. This is underscored by the fact that energy firms actually see the acquisition of rivals for their proven and probable reserves as a better bet than the old exploration and development route.

“We therefore see prices rising,” adds the advisory, “and that should be good for Enbridge Income Fund. It’s rated a buy.”

So both the common stock and the income trust are a buy. But there’s a difference. While both would profit from rising oil prices, Enbridge Inc. could have an eagle-like growth spurt as renewed vigour in the oil sands fuels new pipeline projects.

A progressive pace

Fortis Inc. (TSX-FTS) began life as Newfoundland Power. It now stretches from sea to shining sea (and has power interests in the Caribbean). And it’s been getting a lot of momentum from the west coast.

Two years ago, Fortis effectively repatriated B.C. natural gas distributor Terasen Gas, buying it from U.S. giant Kidder Morgan. After a year of absorbing costs, the acquisition has been paying off handsomely.

Last year, Fortis saw its earnings rise 27 per cent. Earnings per common share rose to $1.56 from $1.40. Among utilities, Fortis sets a very progressive pace.

It has the capacity to generate new growth — even in this sluggish market — and reward its shareholders with income on an annual dividend of $1.04.

A lot of rain

Finally, there are utilities that don’t always supply all that investors may need, even if they do get the product out to the customer.

Great Lakes Hydro Income Fund (TSX-GLH.UN) runs on hydroelectricity and wind power. It turned a big profit in 2008, “mostly because it rained a lot, producing lots of extra water inflows.”

Its fourth-quarter income rose by 65 per cent and for all of fiscal 2008, its cash-per-unit rose to $2.05, more than enough to cover its distribution of $1.25. So what’s not to like?

Great Lakes “is notorious for its results swinging widely at the whim of hydrology conditions, something that the recent acquisition of the Prince Wind Farm should help alleviate.”

Thus this trust is a hold, says the Money Reporter. It’s doing well, but in the stable world of utilities there are better buys at the moment.

Think of it this way. Every time you pay your utility bills, you help put cash in an investor’s pocket. Why shouldn’t it be yours?