Using Ai to Evaluate Investments

Lately, I've been experimenting with an Ai program, Perplexity. It is proving amazing. Yesterday I asked Perplexity to play Canuckle, a word guessing game. It discovered the word in four guesses.

Today, I thought of asking Perplexity to compare Atco and Canadian Utilities and I wondered if there was any reason to hold each in one's portfolio as ATCO is the principal owner of Canadian Utilities Limited with a 52.7% stake. I loved its answer. 

It said, "When considering whether to invest in Atco Ltd. (ACO.X) or Canadian Utilities (CU), or both, it's important to analyze several factors such as dividend yields, growth potential, and overall business strategies. The following is also from its answer.

Dividend Comparison

• ATCO Ltd.:

  • Dividend yield is approximately 4.062%.

  • Recent quarterly dividend is $0.4898 Can. per share, reflecting a commitment to increasing dividends over time.

• Canadian Utilities:

  • Higher dividend yield at about 4.983%.

  • Quarterly dividend is $0.453 Can. per share, with a remarkable track record of increasing dividends for 52 consecutive years. It must be acknowledged that CU also has a history of increasing dividends over time.
    

Financial Performance and Growth

• ATCO Ltd.:

  • Reported adjusted earnings of CA$655 million.

  • Focuses on essential services with a diversified portfolio, including energy infrastructure and logistics, which positions it well for future growth.

• Canadian Utilities:

  • Adjusted earnings of CA$596 million, with a strong emphasis on regulated utility operations.

  • Plans to invest CA$4.6 to CA$5 billion in regulated utilities from 2024 to 2026, aiming for sustained earnings growth linked to infrastructure development.
    

Payout Ratio

• ATCO Ltd.:

  • Payout ratio: 56.5%. (Morningstar)

• Canadian Utilities:

  • Payout ratio: 91.1%, (Morningstar)

Strategic Focus

• ATCO Ltd.:

  • Diversified across energy, logistics, and structures.

  • Emphasizes sustainability and innovation in energy solutions.

• Canadian Utilities:

  • Strong focus on regulated utility businesses and energy transition initiatives.

  • Aims for long-term resilience through strategic investments in infrastructure and technology.

Credit Ratings Overview

• ATCO Ltd. has received a Baa2 rating from Moody's, which is considered to be the fourth highest level on their scale. This rating suggests that ATCO has adequate capacity to meet its financial commitments, but it is subject to some risk during adverse economic conditions.
• In contrast, Canadian Utilities Limited holds a higher rating of A3 from Moody's. This rating implies a stronger credit profile, indicating that Canadian Utilities has a solid capacity to meet its financial obligations and is less susceptible to economic fluctuations compared to ATCO
• Both ATCO Ltd. and Canadian Utilities Limited got similar ratings from S&P (A- with a stable outlook).

Conclusion: Which is the Better Investment?

As can be seen from the information supplied by Perplexity, ultimately the decision must align with one's investment strategy, risk tolerance, and income needs. My investment strategy revolves around dividends. I am retired, I need dividends to live, to make ends meet. 

My risk tolerance is high enough to allow me to own equities rather than GICs and the like. I can accept volatility. That said, stocks can go down but after that they must recover. I do not want a Nortel in my future -- a permanent loss. As this cannot be completely ruled out, I have set limits on how much I will risk by investing in any one stock. I never want to invest as much as 10% of my portfolio in one stock. Five or six percent is a much better ceiling and very few stocks should approach this maximum investment.

As Canadian Utilities yields almost a full percentage more than Atco, I find myself leaning towards making only one investment -- Canadian Utilities. I need the income. Moody's may see both as investment grade but it rates CU a little higher. That is another plus for CU over ACO-X.

To put all the above in perspective, those solid standbys in the utilities sector, Emera and Fortis, do not have ratings as high as either Canadian Utilities or Atco plus Fortis does not meet the four percent yield rule. 

I'm thinking of investing three percent of my retirement money in CU and a further one percent in Atco. Fortis will get the nod for two percent based on its narrow economic moat determined by Morningstar. Emera gets the nod for a three and a half percent investment as it yields the most and can be found in almost all published retirement portfolios.

There is one more utility that I would like to see in my retirement portfolio: AltaGas. Why? I have owned it for years and I have enjoyed a very nice capital gain along with a reliable dividend with sustainable increases. AltaGas gets one and a half percent of my portfolio.

My total investment in the utilities sector is eleven percent with no stock accounting for more three percent of my portfolio. Good income is assured and there is no possibility of a Nortel-like disaster. I can sleep at night. If Hydro One were to drop in value, thus raising its percentage yield, I would consider adding one or two percent of Hydro One to my portfolio but today the yield is simply too low.