Editor’s Note: Please see our analysis of the latest quarterly earnings for 10 of our Dividend Champions in the Portfolio Update following the article below.

The oil shock’s hit to the Canadian economy may be front-loaded toward the first half of the year, but as the latest earnings season shows the resource space is still taking it on the chin.

At this point nearly 82% of the 242 companies on the S&P/TSX Composite Index have reported earnings. Thus far, sales have declined 7.5% year over year, while earnings have plummeted almost 41% over that same period.

Fortunately, there’s no sea of red when you drill down to individual sectors. Instead, the vast majority of the carnage is confined to the energy and materials sectors.

Since we already know that story all too well, let’s dig into a couple of the sectors that are seeing strong growth on the sales and earnings fronts.

With results in for 11 out of 12 companies in the sector, utilities have delivered sales growth of 8.6%, while earnings have jumped nearly 40%.

Fortis Inc. (TSX: FTS, OTC: FRTSF), which is one of our favorite utilities, had another blockbuster quarter. Sales were up 31% year over year, to CAD1.6 billion, while adjusted earnings per share more than doubled, to CAD0.52.

The single biggest factor in this performance was the Canadian utility giant’s acquisition of Arizona-based UNS Energy Corp. last year. The deal closed in mid-August 2014, so the year-ago period’s results didn’t include a full-quarter contribution from UNS.

Additionally, UNS’ performance is highly seasonal, with the second and third quarters typically accounting for 75% of the firm’s full-year earnings.

While we’re certainly enjoying the boost to earnings, it’s important to note that Fortis will face tougher comparables in future quarters, since the fourth quarter of last year was the first full quarter in which UNS was part of the Fortis empire.

Also worth mentioning is the fact that the UNS acquisition along with recent divestitures is helping Fortis inch ever closer to becoming a fully regulated utility. In the latest quarter, regulated revenue came in at 95.2% of total revenue, a 1.5 percentage point improvement from a year ago.

At the same time, the company’s non-regulated businesses are still an important contributor to the bottom line. They delivered 17.4% of profits, up from 12.4% a year ago.

With a forward yield of around 4%, there’s still more to come. Cash flows from Fortis’ regulated operations will flow through to the dividend. While the company’s payout has grown 3.7% annually over the past five years, management is now projecting the dividend will grow 6% annually through 2020.

We have more on Fortis in the Portfolio Update section below, as well as much more in the latest issue.

The telecom sector also had another very respectable quarter. Of course, it helps that Canada’s Big Three essentially operate as an oligopoly.

Among our favorite stocks in the sector, BCE Inc. (TSX: BCE, NYSE: BCE) saw adjusted earnings per share rise 12% year over year, to CAD0.93, on sales growth of 3%, to CAD5.4 billion.

BCE was the big winner in net postpaid wireless customer growth, with 78,000 new subscribers, narrowly beating Rogers Communications Inc. (NYSE: RCI, TSX: RCI).

While sales growth in an oligopoly isn’t always all that spectacular, the margins from high-value smartphone customers lead to decent profits. Analysts expect BCE to grow earnings 5.2% annually over the next two years.

The company has increased its payout 8.2% annually over the past five years, and more cash is on the way. Analysts forecast BCE’s dividend will rise 4.5% annually through 2017. BCE has a forward yield of 4.6%, and we have more on the company in the Portfolio Update section below.

Despite the challenges facing Canada’s economy and its resource space, our selective approach to high-quality dividend stocks is still grinding out winners.

The Dividend Champions: Portfolio Update

By Deon Vernooy

With a U.S. Presidential permit now formally denied for the proposed border crossing of the Keystone XL pipeline, TransCanada Corp. (TSX: TRP, NYSE: TRP) is weighing its options, including the re-filing of an application for a permit. However, for now, the project will not go forward, and it is therefore important to consider the implications of the permit denial for TransCanada.

First, some background: Keystone XL was to provide an 800,000 barrel per day extension to the existing 4,200 kilometer Keystone liquids pipeline, which runs from Hardisty in the Canadian province of Alberta to the U.S. Midwest and the U.S. Gulf Coast. Part of the Keystone XL pipeline, connecting Cushing, Oklahoma, to the Gulf Coast was completed in January 2014.

TransCanada has already spent USD2.8 billion on the project over the past seven years, and there is a chance that this may have to be written off completely, or at least partially. To provide an indication of size, a complete write-off represents around 6% of the total assets, or $3 per share. So while not a disaster for TransCanada, it will certainly hurt the balance sheet.

Perhaps more significant are the implications for oil producers in the landlocked Alberta and Saskatchewan areas. Canadian oil has been finding its way to clients as evidenced by the 56% increase in oil exports from Canada to the U.S. over the past seven years. Unfortunately, the means of transport (rail, barge, and even truck) are less cost-efficient than pipelines and less safe as well.

The three remaining large oil pipeline projects, Energy East, Trans Mountain and Northern Gateway, currently under consideration have now increased in importance for the Western Canadian oil producers. TransCanada is the sponsor of the $12 billion Energy East pipeline system, which will connect the country’s oil producers to the Canadian East Coast refineries and will have a capacity of 1.1 million barrels per day. This is expected to be ready in 2020.

While the permit denial is a disappointment for TransCanada and will in all likelihood result in considerable asset write-downs, it was widely expected by market participants. TransCanada is a formidable operator providing a vast and crucially important energy infrastructure serving gas and oil producers and consumers.

With the share price down by 30% since the September 2014 peak and by 4% on Friday after the announcement, we believe that the market has already adjusted the value of TransCanada shares for the lower energy price environment as well as the permit disappointment. We have adjusted our fair value for TransCanada by 4% to USD32/CAD45 to reflect the firm’s lower long-term growth potential without Keystone XL. Our advice is that current investors should continue holding their shares.

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BCE Inc. (TSX: BCE, NYSE: BCE) delivered another steady quarter, with adjusted earnings per share up by 12% and a dividend that was raised by 5.3%.

The secular trend of strong growth in the wireless and Internet categories and declines in the legacy landline category continued in the quarter. Wireless EBITDA (earnings before interest, taxation, depreciation and amortization) increased by 8.3%, with subscriber numbers up 1.8% compared to a year ago, while average revenue per user increased a whopping 6.1%.  

The wireline business, which includes landlines as well as Internet connections, increased EBITDA by 1.1% despite a further decline in landline voice connections. Strict cost control and a 4% increase in high-speed Internet connections made up for the landline deficiencies.

The balance sheet is somewhat strained with a debt-to-capital ratio of 57%, mainly as a result of high capital expenditures in the recent past, as well as the acquisition of the Bell Aliant minority stake in 2014. Operating cash flow remains strong and free cash flow (which is a key determinant for dividend payments) increased by 9% so far this year.

BCE remains one of our top holdings in the Dividend Champions Portfolio. The reasonable valuation and 4.6% dividend yield provides much comfort for attractive returns over the medium to long term. Our fair value estimate is USD50/CAD65.

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Telus Corp. (TSX: T, NYSE: TU) delivered a 5.2% increase in third-quarter earnings per share and increased the dividend by 10%.

The operating trends were very similar to those reported by BCE, with sound growth in the wireless and Internet divisions, but declines in the landline business. The wireless division increased EBITDA (earnings before interest, taxation, depreciation and amortization) by 2% in the quarter, thanks to a 2.8% increase in subscribers and a 1.1% increase in the average revenue per user. A key factor was the 12% increase in wireless data revenue, as users upped their Internet, video and gaming activities on their mobile devices.

The wireline business reported a small drop in quarterly EBITDA, mainly as a result of the decline in landline subscribers and usage as well as restructuring costs. High-speed Internet connections increased by 6.3% and TV connections by 10%, with data revenue up by 11%.

While these are credible results, we are somewhat concerned by the further increase in net debt, which now amounts to 61% of capital. The increase in debt is caused by considerable capital expenditures on the acquisition of spectrum licenses over the past two years and the cost to develop the infrastructure to exploit the licenses.

We also note that Telus’ short- and long-term credit ratings were recently downgraded by the rating agency DBRS, though the ratings are still investment grade.

Cash flow remains sound, and both operating and free cash flow increased during the first nine months of the year. In addition to the $1 billion per year dividend program, Telus spent $2 billion on share buybacks over the past two years.

To my mind, Telus will have to scale back on the share-repurchase program to maintain its dividend and capital expenditures, while continuing to enjoy an investment-grade credit rating.

Telus trades at a very reasonable valuation, with a dividend yield of 4.2%. The company remains a firm holding in the Dividend Champions Portfolio, but we are wary of the high debt levels. We estimate a fair value for the common shares at USD38/CAD49.

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Brookfield Infrastructure Partners LP (TSX: BIP-U, NYSE: BIP) announced a 7% year-over-year increase in quarterly funds from operations per unit. A dividend of USD0.53 for the third quarter, 10.4% higher than a year ago, was also declared.

The conclusion of the AUD8.9 billion Asciano acquisition is currently the key issue for the company, which ran into trouble when rival bidder Qube and partners acquired 19.99% of shares outstanding and indicated that they would try to block the deal. The Australian Competition and Consumer Commission also raised objections to the deal.

Subsequently, Brookfield announced that it would no longer seek to acquire Asciano through a buyout arrangement, but will make an outright takeover offer to Asciano shareholders for AUD9.22 per share. This was trumped by a slightly offer from Qube, though the Asciano board indicated that they would recommend the Brookfield offer.

The dividend yield on the stock is currently an attractive 5.1%, but given the sharp rise in the share price and the risk that Brookfield may eventually overpay for Asciano, we will not be buyers of the stock until the deal metrics are clarified. For now, Brookfield Infrastructure is a Hold.

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Sun Life Financial Inc. (TSX: SLF, NYSE: SLF) reported profits slightly higher than the previous year, with a 2.4% increase in basic underlying earnings per share, which excludes market-related gains and losses and changes in actuarial assumptions.

The dividend per share was increased by 8.3%, which is probably a good indication of the board’s view on the underlying performance and financial strength of the business.

At the operating level, we note strong premium and deposit growth in Canada and in Asia, with a weaker performance in the U.S.

MFS, the formidable asset management operation located in Boston, continued to struggle, with a 1.2% decline in assets under management, though after-tax profits increased by 5%.

Sun Life has concluded several smaller acquisitions in the current financial year, and the CEO said he’s interested in doing more.

The company has come a long way since the difficult days of the Global Financial Crisis, which resulted in a dividend that was held steady for seven years as the company rebuilt its capital position. With a 3.6% dividend yield and reasonable growth ahead, we are comfortable holders of the stock at current prices. We estimate the fair value at USD33/CAD43.

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Asset management firm CI Financial Corp. (TSX: CIX, OTC: CIFAF) delivered decent results for the third quarter, despite sharp declines in the global equity markets. Earnings per share increased by 6% compared to a year ago, while the dividend was increased by 10%.

Total assets under management, which is the lifeblood for asset management firms, dropped in the third quarter as equity markets declined. But the firm still reported total assets 5% higher than a year ago. Net sales of $431 million were less than the comparable quarter, but year-to-date net inflows were an impressive $3.1 billion.

Cash flows remain strong, while minimal capital expenditures leave a very high level of free cash flow. The company is using its cash to buy back shares from the market, grow dividends and make bolt-on acquisitions.

The recent acquisition of First Asset Capital, an expert provider of exchange-traded funds, should provide CI Financial with an entry into the fast-growing product group.

The dividend is well covered by free cash flow and profits, and the current yield is 4.2%. We estimate a fair value of USD27/CAD35 and are comfortable holders of the stock in the Dividend Champions Portfolio.

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Shawcor Ltd. (TSX: SCL, OTC: SAWLF), the energy services company with a core specialization in pipeline coatings, reported a much improved third-quarter result after the large restructuring charges taken in the second quarter. Profits are somewhat distorted, meaning that the 5% year-over-year increase in adjusted EBITDA (earnings before interest, taxation, depreciation and amortization) is a better indicator of how the actual business performed. The dividend was unchanged.

The order backlog dropped by 8% from the second quarter, and the CEO offered a somber outlook for 2016 given the depressed state of new orders.

The balance sheet is in excellent shape and cash flow is reasonable, which should support the dividend if the difficult times continue.

This is the smallest holding in the Dividend Champions Portfolio. With a yield of 2.1% and little prospect for future growth, we will be looking for an opportunity to sell our holding. For now, Shawcor is a Hold.

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There was much to enjoy in the Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) third-quarter results. Earnings per share increased by 25%, funds from operations by 42%, and the dividend by 6.1%.

The oil pipelines increased funds from operations by 49%, as expansions at the Cold Lake and Polaris systems came into operation. The bulk liquid storage division increased funds from operations by 47%, as utilization rates improved considerably. The only negative spot was the gas extraction business, which represents less than 10% of profits, where lower frac-spreads depressed profits by 31%.

The company has completed a major expansion program over the past few years and is now reaping the benefits. Capital expenditures are already sharply down, which will result in substantial free cash coming available over the next few years. Apart from a reduction in debt, a good portion of cash may also be allocated to dividend payments.

We consider the stock to be considerably undervalued, with a fair value of USD24/CAD31. IPL currently yields 6.2%. This is one of our largest holdings in the Dividend Champions Portfolio, and we plan to hold on for what we believe could be considerable upside.

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H&R REIT (TSX: HR-U, OTC: HRUFF) reported funds from operations per unit of $0.49, a 7% increase compared to the previous year. The distribution per unit is unchanged.

Despite the high-quality and geographically well-diversified portfolio, H&R’s share price remains depressed. The most likely causes are the 28% of net operating income derived from energy-dependent Alberta, as well as the disclaimed leases by bankrupt Target Canada.

The Alberta component of the portfolio showed few signs of distress, and the only real concern is the imminent departure of Telus Communications from the Telus Tower when the lease expires in early 2016. The space under consideration equates to around 1.4% of the total office space in the portfolio.

The re-leasing of the eight locations that have been vacated by Target is progressing well, and announcements regarding almost 80% of the space are expected early in 2016.

H&R continues to trade at an attractive valuation, with a 19% discount to estimated net asset value per unit and a 6.4% dividend yield. We are somewhat concerned about the lack of dividend growth, but we’ll continue to hold the units, which have a fair value of USD17/CAD23, in the Dividend Champions Portfolio.

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Fortis Inc. (TSX: FTS, OTC: FRTSF) is fast shaping up to be our utility of choice. The firm reported a 68% increase in earnings per share for the third quarter compared to the previous year. The dividend was previously raised by 10%.

The sharp increase in profits came as a result of a full contribution of Arizona-based utility UNS, which was acquired in mid-August 2014, a profit bump as a result of the weaker Canadian dollar and a higher contribution from Fortis Alberta, which benefitted from growth in the rate base and more customers.

Fortis now owns a well-diversified regulated utility asset base spread across the U.S. and Canada, which contributes to a reduction in the company risk profile. On the back of a further $9 billion of project expenditures over the next five years, the company expects the rate base to expand by 4.5% per year and indicates a 6% per year growth in the dividends per share.

The company carries a high investment-grade credit rating. And the balance sheet is reasonably levered, with a debt-to-capital ratio of 55%, which is appropriate for its low-risk business profile. Cash flow remains solid, and free cash flow covers the capital expenditures and dividends paid so far this year.

The stock currently yields 4%. We estimate Fortis has a fair value of USD30/CAD40.