This post originally appeared on Dividend Growth Investing & Retirement.
Each month, I update readers of all the dividend increases in the Canadian Dividend All-Star List (Canadian companies that have increased their dividend for 5 or more years in a row) along with a summary of these companies.
Tracking recent dividend increases can be a good way to generate new dividend growth stock ideas, as dividend increases can be a sign from management that they feel good about the future.
"Dividends Tell the Truth
Dividends and dividend growth are the real-life signal that a company has the wherewithal to pay you dividends, that it has your interests at heart in the fact that it pays you dividends, and that it is experiencing real growth as proven by the real growth in its real dividends."
Source: A Case for Dividend Growth Strategies. S&P Global Research Paper by Tianyin Cheng, Vinit Srivastava, and Izzy Wang
Out of the 101 companies in July's Canadian Dividend All-Star List, there were only two dividend increases:
- Capital Power Corp. (OTCPK:CPXWF, TSE-CPX), which increased its dividend by 7.3%, and
- Equitable Group Inc. (OTC:EQGPF, TSE-EQB), which increased its dividend 6.5%. This was the 4th increase in the past year.
July 2019 Dividend Increases in the Canadian Dividend All-Star List
Capital Power Corporation (TSE-CPX) - 7.3% Dividend Increase
Capital Power is a North American independent power producer headquartered in Edmonton, Alberta. The company develops, acquires, owns, and operates power generation facilities using a variety of energy sources.
Capital Power owns approximately 6,000 megawatts (MW) of power generation capacity at 26 facilities across North America. Approximately 900 MW of owned generation capacity is in advanced development in Alberta and Illinois.
(Source: Investor Fact Sheet Q2 2019)
Capital Power Dividends
Capital Power Corporation, which has a dividend streak of 5 years, recently increased its quarterly dividend 7.3%, from $0.4475 CAD to $0.4800 CAD.
This dividend increase comes into effect with the dividend recorded on September 30, 2019. The dividend yield as of July 31, 2019, was 6.5%, and the company has a 5-year average annual dividend growth rate of 6.5%.
Capital Power has been paying dividends since it went public in 2009, but the company didn't start increasing it until 2014.
Currently, it is guiding for 7% annual dividend growth to 2021.
(Source: Investor Fact Sheet Q2 2019)
This 7% dividend growth guidance is based on an adjusted funds from operations (AFFO) payout ratio target of 45-55%.
By my calculations, the company is slightly below its AFFO payout ratio target even after this most recent dividend increase to $0.48/quarter. This suggest that it should be able to meet its dividend growth target, especially considering that management has stated in the most recent management's discussion and analysis (MD&A) that, "Based on the actual results for the first half of 2019 and the Company's forecast for the second half of 2019, the Company expects adjusted funds from operations for 2019 to be at the top end of the adjusted guidance range."
That said, it is using a less conservative payout ratio target by using AFFO instead of EPS.
Based on its next-12-months EPS estimate of $1.94, the EPS payout ratio is just under 100%. Normally, I like a company to have a 60% EPS payout ratio or lower, and for utilities, I'll go up to 70%.
I think that Capital Power Corp.'s dividend growth guidance will be fine so long as the company can keep its credit ratings at investment grade (BBB- or above). If one of the credit rating agencies were to signal or cause a credit rating downgrade from investment grade, then I wouldn't be surprised to see a dividend freeze or cut.
Remember, you can have a high payout ratio and have dividend growth, but it's a riskier investment. In these higher payout ratio scenarios, I want to see strong financial strength before investing.
Capital Power Financial Strength
S&P and DBRS both give Capital Power Corp. BBB- or equivalent credit ratings, which is two notches below the BBB+ or equivalent I typically like to see. For utilities, I will go as low as BBB, but Capital Power Corp. is still below this.
(Source: Investor Fact Sheet Q2 2019)
Capital Power Historically High Dividend Yields
Capital Power's dividend yield is looking reasonably high, but it has been higher in the recent past.
FYI, the company went public in 2009, which is why there is no dividend yield information from 2003 to 2008 in the chart.
Capital Power Final Thoughts
I can see why some investors would be attracted to Capital Power for its +6% dividend yield and 7% annual dividend growth guidance to 2021, but for me, it's a pass.
Yes, I think the company's dividend growth guidance will probably be fine so long as it can keep its credit ratings at investment grade (BBB- or above), but...
The credit ratings at BBB- are too low for me. If one of the credit rating agencies were to signal or cause a credit rating downgrade from the current BBB- investment grade rating, then I wouldn't be surprised to see a dividend freeze or cut.
This isn't something I'm expecting, but ultimately, Capital Power Corp. doesn't meet my risk tolerance levels, as I want credit ratings of BBB+ or higher, and BBB or higher for utilities.
Also, the company started paying a dividend in 2009 when it went public, and its dividend streak is on the low side at 5 years. It's not a company that has had its dividend tested during a major crisis like the Global Financial Crisis.
Equitable Group Inc. (TSE-EQB) - 6.5% Dividend Increase (4th increase in the past year)
Equitable Group operates through its subsidiary Equitable Bank, which is a branchless Canadian bank that offers residential lending, commercial lending, and savings solutions. Its residential mortgages are to customers who have the financial resources to achieve real estate ownership but don't qualify for a mortgage in the prime market. This includes self-employed borrowers, new Canadians, and the credit challenged.
Equitable Group Dividends
Equitable Group, which has a dividend streak of 8 years, recently increased its quarterly dividend 6.5%, from $0.3100 CAD to $0.3300 CAD.
This dividend increase comes into effect with the dividend recorded on September 13, 2019. The dividend yield as of July 31, 2019, was 1.4%, and the company has 5- and 10-year average annual dividend growth rates of 12.5% and 10.4% respectively.
In the past few years, Equitable Group has been increasing its quarterly dividend multiple times each year. A year ago, the dividend was $0.27, then it increased that 4 times over the next four quarterly dividends, with this most recent increase resulting in a $0.33 quarterly dividend.
If you factor in the four increases, then the annual increase was 22.2% ($0.27 to $0.28, then to $0.30, then to $0.31, and with this latest announcement to $0.33).
Equitable Group Dividend Growth Guidance
Equitable Group announced in the 2019 second-quarter report that it plans to grow the dividend by 20-25%/year for the next five years.
(Source: Equitable Group Second Quarter Report 2019)
Planning for 20-25% dividend growth each year is impressive, and with a very low payout ratio of 11% (based on the next 12 months' EPS estimate of $11.96), I think the company can do it so long as it doesn't get into trouble with the credit rating agencies.
If one of the credit rating agencies were to signal or cause a credit rating downgrade from the current investment grade rating, then I wouldn't be surprised to see a dividend freeze or cut. I'm not expecting this in the near term, as the trend rating for Equitable Group Inc. was changed to positive in July 2019.
Equitable Group Financial Strength, Historically High Dividend Yields
DBRS gives the company a credit rating of BBB (low), which is two notches below the BBB+ or equivalent I typically like to see.
Keep in mind that the trend rating recently changed to positive, so the credit rating could be going up in the future.
The current dividend yield of 1.4% is low compared to some of its historical highs.
Equitable Group Inc. Final Thoughts
Despite the recent strong dividend growth and the impressive guidance of 20-25% dividend growth per year over the next five years, this is not a stock I'm interested in.
The credit rating is too low at BBB (low), and the yield at 1.4% is also too low. On top of that, my portfolio already has enough financials.
If you are looking to add Canadian financials, start with the Big 6 banks. I feel like the big banks give you a better mix of high dividend yield and decent dividend growth prospects, plus they are in a much better financial position (higher credit ratings) than Equitable Group.
Disclosure: I don't own the stock Equitable Group Inc., but I do bank with EQ Bank.
Monitoring dividend increases is a good idea because it can be a sign from management that they feel good about the prospects of the company.
In July 2019, there were 2 dividend increases in the Canadian Dividend All-Star List (An Excel spreadsheet with a lot of stock information on all Canadian companies that have increased their dividend for 5 or more calendar years in a row):
- Capital Power Corporation - 7.3% Dividend Increase
- Equitable Group Inc. - 6.5% Dividend Increase (4th increase in the past year)
I'm not interested in either of these companies, as they both have credit ratings that are too low for me. That said, I can see why some investors would be interested in these companies, as:
- Capital Power Corporation has a high dividend yield of 6.5% and is guiding 7% annual dividend growth to 2021, and
- Despite Equitable Group Inc.'s low yield of 1.4%, it has strong dividend growth, and it is guiding an impressive 20-25% annual dividend growth over the next five years.
Disclosure: I do not own shares of any of the above-mentioned stocks. You can see my portfolio here.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.