This defensive sector has seen better days, but thanks to increased demand, the prospect of rate cuts and the surprising benefit of AI (Artificial Intelligence), the utilities sector is on fire. In the U.S., utilities is the top performing sector in 2024. And we’ll include the Canadian pipelines as quasi utilities as they often include power production assets. And they provide natural gas to utilities. The pipeline stocks all delivered very good results in recent reports. You’ll find the topline numbers below. This is welcome news for many Canadian investors, including moi. Pipeline stocks and utilities are fighting back in this very robust Sunday Reads.
The pipelines are moving again
TC Energy (formerly TransCanada Pipelines) set records for gas pipeline deliveries as earnings and revenue increased significantly. The earnings beat, while revenues matched estimates.
Q1 comparable EBITDA of C$3.09B jumped 11% year over year and beat the C$2.98B analyst consensus, while revenues rose 8% year over year to C$4.24B, broadly in line with the C$4.21 billion analysts were expecting.
Enbridge beat on earnings and revenues
At Enbridge, earnings increased 11% from $4.5 billion to $5.0 billion, while distributable cash flow increased by 9% to $3.5 billion.
Pembina Pipelines also saw an impressive increase in profits and adjusted cash flow per share.
In August of 2023 I looked at pipeline stocks and asked – Should you run away from TC Energy and pipelines? Of course the answer was – no.
The pipeline stocks had a very strong week seeing nice price gains. They are up from 5% to 10% over the last month.
Utilities beat tech in 2024 thanks to AI
Data centres and the electrification of the auto sector will drive energy demand. Morningstar reports on why utilities is the top performing sector in 2024. It’s not because there are fears of a weak U.S. economy …
I don’t think the fact that utilities are rallying is a big warning sign for the market,” Hickey said. “It’s a rotation – some investors are looking for the play on AI and the power needs required.
Bespoke Investment Group
From TC Energy CEO, via Seeking Alpha …
Natural gas demand growth is continuing in powering the U.S. as electricity demand grows,” CEO François Poirier said on the company’s earnings conference call, according to Bloomberg, adding that 2023 was “a record year for power burn across the U.S. and that strength is continuing into 2024.
I am happy to see this defensive sector do well. The prospects for uranium (thanks to clean-energy nuclear demand) are in a nice uptrend as well. I hold HURA in my TFSA and that is up 80% over the last year. I also hold CHPS from Horizons that will certainly ‘play’ the AI trend.
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Related post: Will AI power your portfolio?
I will have to admit (ironically) that I did not mention that AI would literally drive the power industry. But again, we’ll take the additional tail wind.
Core stocks on a recovery run
This week I took a peak at my core Canadian stocks. While they have been chronic underperformers they are battling back.
From April 22 to May 9
- BCE 3.2%
- Telus 3.4%
- TRP 6.1%
- ENB 7.3%
- TD -3.7%
- RBC 4.0%
- BNS 1.7%
AVG 3.2% plus dividends
- VDY 2.4%
- XIU 1.9%
The pipelines lead the way. And fortunately my Canadian oil and gas stocks have been holding down the fort for a few years. That’s no surprise, as they are inflation-friendly holdings. My U.S. stocks are the stars (and stripes) of the portfolio.
U.S. earnings got the beat
And more on why it’s not a fear of economic weakness propelling the utilities sector – With well over 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1% growth, according to LSEG IBES.
After a pullback, U.S. stocks are on the move again …
The Bank of Canada is getting nervous?
Just as there is a lag effect for interest rate hikes to reduce economic activity, rate cuts can take a while to get to work (helping the economy and consumers) as well. Bank of Canada Tiff Macklem knows that the mortgage resets in the pipeline will cause significant stress. Via the Globe & Mail …
If more Canadians lose their jobs, the unemployment rate goes up, all of a sudden that stress, that vulnerability is really at risk of crystallizing,” Governor Tiff Macklem said in a press conference about the report.
“More households won’t be in a position to pay that mortgage, particularly given the larger reset. So it is a vulnerability. And the point here is households and banks need to get ahead of that. We know what’s coming.
The Bank of Canada commented on the mortgage rate reset tsunami arriving in 2025 and 2026. Kirk Lubimov added this …
The Bank of Canada signalling rate cuts has certainly helped the utilties sector stock performance. It’s is a sector that carries large debt, any decrease in borrowing costs is more than welcome. There may also be less competition (for investors’ dollars) with generous GICs, cash ETFs and short term bonds.
Sell in May, no way!
There is no way to stickhandle in and out of markets. We always stay invested. I dislike most investment sayings, but this cliché is worth repeating.
It’s time in the markets, not timing the markets.
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More Sunday Reads
Given the robust earnings reporting, we’ll start with Dividend Hawk and his weekly wrap.
Included in the mix from Hawk was more on the ‘struggling’ Canadian telco sector …
TELUS Corporation (TSE:T) Reports Financial Results For First Quarter 2024; T reported quarterly adjusted earnings of C$0.26 per share for the quarter ended in March, lower than the same quarter last year, when the company reported EPS of C$0.27. The mean expectation of thirteen analysts for the quarter was for earnings of C$0.23. Revenue fell 2% to C$4.87 billion from a year ago, analysts expected C$5.02 billion. Management reiterated its financial targets for 2024, including adjusted EBITDA growth of 5.5% to 7.5%, consolidated capital expenditures of about $2.6 billion and free cash flow of about $2.3 billion.
I have kept all of my Telus, but I did recently report on why I sold half of my Bell stock.
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Hawk also shared things we believe that arent’ true from Mike The Dividend Guy. You’ll also find Mike’s take on the Canadian telco troubles. On BCE Mike says there was some good news, some bad news and some UGLY news (my emphasis). Mike sees some promising numbers and guidance from Telus.
Can you retire early?
We’ll then turn our attention to the weekly posts and podcasts from Banker on Wheels. The headline asks – can you afford to retire early? The following is a snip, you will have to head to BOW to hit that live link ‘Read more’.
Once again, the Banker post is a good ride.
There’s some solid retirement-focused posts on Findependence Hub this week including – Inflation is getting to retirees and some pre-retirees.
Cut The Crap Investing readers will know that I endorse the idea of dedicated inflation protection for retirement and when we are in the retirement risk zone.
To hedge inflation (or not) is a personal decision. I have long suggested Canadian oil and gas stocks (that’s the original post from late 2020) and the Purpose Real Asset ETF – PRA.
That oil and gas post is from about ‘500% ago’ 😉
Also on the retirement front Fritz at The Retirement Manifesto is back with 3 tips to improve your retirement. The lessons from their recent retirement vacation.
- Pursue Serendipity
- Savor Boredom
- Embrace Change
It is a simple but wonderful post. And I would agree – wholeheartedly. I love happenstance discovery. And on my recent trip to Florida I often embraced periods of ‘doing nothing’, such as sitting by the pool while reading a book, staring at the ocean or sitting outside my room strumming the guitar. Doing nothing is learned behaviour and you have to ‘work’ at giving peace a chance – let your mental motor wind down to a crawl.
And from a guy (Kyle Prevost) who has some experience in this area (pun intended) – the best countries for Canadians to retire abroad.
Converting Canadian Dollars to U.S. Dollars
Bob at Tawcan offers a very good look at performing Norbert’s Gambit – a low-fee way to convert Canadian Dollars to U.S. dollars in your investment accounts. Bob includes some specifics on how to do that maneuver at various discount brokerages. You’ll see that Wealthsimple Trade does not enable Norbert’s Gambit.
Of course, it’s is crucial to hold U.S. investments. There is a benefit to holding those U.S. stocks and ETFs in U.S. Dollar accounts – RRSP and Taxable. You’ll won’t face the withholding taxes on U.S. dividends. For your taxable accounts you will have to file for tax recovery.
Dividends are ‘fun’ but …
At My Own Advisor Mark looked at a situation that I’ve seen readers mention a few times – paying unnecessary taxes on the big Canadian dividends. They are NOT tax efficient for generous income earners who hold taxable accounts. Remember, the only thing that matters in accumulation is your total return.
More money is more better.
Dale
There’s no need to count your dividends, especially if it leads to higher taxes and lesser returns. And of course counting dividends doesn’t make sense if your goal is to make the most money – have the most prosperous retirement possible.
That said, if a dividend approach helps to create greater returns, I’m on board. Check out the Beat The TSX Portfolio. But again, in a taxable account those higher taxes will eat away at any potential outperformance. Do the math.
Got chips?
At Stocktrades Dan takes a look at that CHPS ETF that I’ve mentioned above as a TFSA holding. Many will have a core and explore portfolio. The explore holdings might be more adventurous (seeking growth) or even part of an investor’s ‘play money’ if they are covered by their core assets. I like the semiconductors and uranium as explore candidates.
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Hi Dale,
regular reader of your letters/ posting thanks… Wondering if you have an opinion on owning Canadian such as TRP stocks in US cash acct ( retired income investor and pipelines junkie).
I draw off US cash for travel in the US . The only small gain i see is getting the Can div tax credit – Initially though i was getting an advantage on the exchange but think not.
Appreciate your thoughts on the strategy
Hi Ken, thanks for stopping by. TC Energy (TRP) is not a dual listed Canadian stock – there is no U.S. version. You can use Enbridge and Pembina Pipelines and U.S. pipelines. Best to avoid TC Energy in that U.S. account. And it would be wise to hold a diversifed mix of U.S. stocks in your U.S. account – or use an ETF or two.
I have read conflicting reports on whether Canadian dual listed stocks in a U.S. account qualify for the dividend tax credit – I will check that out and get back to you.
But if you are searching for Canadian dual listed stocks you’ll find the list in this post from Dividend Earner …
https://dividendearner.com/canadian-dual-listed-stocks/
All said, we are best to use U.S. stocks and ETFs to gain that exposure – that’s where they keep most of the best companies on earth.
Enbridge site offers that dual listed would get the dividend tax credit …
Canadian Shareholders
Unless otherwise indicated, common and preferred share dividends paid by Enbridge Inc. (ENB), either in Cdn or US dollars, will be designated as “eligible dividends” for Canadian income tax purposes except as described below*. An eligible dividend paid to a Canadian resident is entitled to the enhanced dividend credit.
Hmm
In my TD : shows TC Energy Corp on NYSE in US dollars
and I did check that div would in fact be eligible for the Div tax credit
I also note its not all in TC, I have a small sector mix in US : AT&T and HHL.U at nice entrys
I chose TC as I am heavy on Enbridge and PPL in various cnd accts
Cheers
Ken
Thanks Ken, HHL.U is a great hold especially for retirees. Healthcare and consumer staples would be the top sector overweights for retirement says my research. Very importatnt to hold significant U.S. for currency and to fill in a Canadian’s sector portfolio holes.