Canadian Utilities Limited: Assessing Dividend Sustainability for Long-Term Income Investors

For dividend-focused investors, Canadian Utilities Limited (TSX:CU) has long been a staple in portfolios seeking stable income. However, the company's recent financial trajectory raises critical questions about the sustainability of its dividend in the long term. While its 5.92% yield as of October 2025, according to the cash flow statement, appears attractive, the underlying fundamentals-particularly its dividend payout ratio and debt levels-demand closer scrutiny. (cash flow statement)

The Payout Ratio: A Growing Red Flag

Canadian Utilities' dividend payout ratio has surged to 128.25% as of September 2025, meaning the company is distributing more in dividends than it earns over the trailing twelve months (TTM), according to the dividend payout ratio. (dividend payout ratio) This represents a significant deterioration from its 3-year average of 105.55% and places the ratio in the bottom 10% of its industry. Such a high payout ratio is inherently risky, as it leaves little room for earnings volatility or unexpected expenses. For context, a payout ratio above 100% typically signals that a company is relying on debt or asset sales to fund its dividend, which is unsustainable over time, according to DividendPedia. (DividendPedia)

Historical trends further underscore the concern. The ratio climbed from 84.92% in December 2023 to 98.70% by June 2024 before spiking to 128.25% in Q3 2025, as shown in the Q1 2025 slides. (Q1 2025 slides) This trajectory suggests that the company's ability to maintain its dividend is increasingly contingent on earnings growth outpacing payout increases-a scenario that may not materialize if economic or regulatory headwinds emerge.

Financial Health: Debt and Cash Flow Challenges

Canadian Utilities' leverage is another area of concern. Its debt-to-equity ratio stands at 1.58, indicating a heavy reliance on debt financing, per the cash flow statement. Over the past five years, the company's debt-to-EBITDA ratio has averaged between 5.34x and 5.68x, while its debt-to-free cash flow ratio peaked at 40.71x in 2022, according to MarketScreener. (MarketScreener) These figures highlight a structural imbalance between debt obligations and cash flow generation.

Despite a reported Q3 2025 cash flow from operations of $2.02 million (per the cash flow statement), the company's capital expenditure plans for 2025–2027-$5.8 billion-pose a significant strain on liquidity, as outlined in the Q1 2025 slides. While these investments aim to boost infrastructure and rate base growth (projected at 5.4% CAGR), they also require substantial debt financing. For instance, Q1 2025 capital spending reached $401 million, up from $316 million in Q1 2024 (per the Q1 2025 slides). If earnings growth fails to offset these costs, the company may face pressure to reduce its dividend.

Future Outlook: Can Growth Offset Risks?

The company's management has emphasized its "capital discipline" and "strong operating cash flow" as pillars for sustaining dividends, according to the dividend payout ratio data. While adjusted earnings grew 3% year-over-year in Q1 2025 (as noted in the Q1 2025 slides), this rate lags behind the dividend growth trajectory. Projections of a $0.46/share dividend in Q1 2026, cited by MarketScreener, hinge on the assumption that earnings will outpace payouts-a scenario that appears increasingly uncertain given the current payout ratio of 128.25%.

The utility sector's regulated nature offers some stability, as Canadian Utilities benefits from long-term contracts and predictable cash flows (per the dividend payout ratio). However, regulatory risks-such as delays in approving rate base projects or stricter environmental mandates-could disrupt earnings. For example, the company's Yellowhead Pipeline and CETO projects, while promising, require regulatory approvals and are vulnerable to cost overruns (as discussed in the Q1 2025 slides).

Conclusion: A High-Yield Trap?

Canadian Utilities' 5.92% yield is undeniably appealing, but the company's financial metrics paint a cautionary picture. A payout ratio exceeding 100%, coupled with a debt-heavy balance sheet, suggests that the dividend is not currently supported by earnings or cash flow. While the company's capital expenditure plans aim to drive future growth, these investments may exacerbate short-term liquidity pressures.

For long-term income investors, the key question is whether Canadian Utilities can align its payout ratio with sustainable earnings growth. Until then, the stock carries a higher risk of dividend cuts-a scenario that could erode investor confidence and drive down share prices. Investors seeking reliable income may want to monitor the company's earnings reports and regulatory developments closely before committing.