Canadian utility companies have consistently drawn interest from investors for a variety of reasons. Utilities have offered stable and consistent income for investors that have been drawn away from guaranteed income vehicles due to lower yields.
I recently discussed several stocks that investors should target if they are worried about a stock market bubble. The torrid pace of the S&P/TSX Index since late August may have drawn attention away from utilities, but let’s look at two reasons why investors should be paying close attention with recent developments in mind.
Low borrowing rates may be here to stay
The Bank of Canada’s decision to keep the benchmark interest rate at 1% did not come as a surprise for the stock market. The central bank cited concerns over household debt, souring NAFTA negotiations, and inflation as reasons to remain cautious. Above all, the central bank has made clear that it intends to be relatively malleable in how it will approach its future rate decisions.
Governor Stephen Poloz expects inflation to rise to 2% by the end of 2018. With more hawkish projections putting three interest rates on tap for next year, it is more than likely that the benchmark will remain below this number. The continuation of low interest rates in the foreseeable future is good news for borrowers.
In Fortis Inc.’s (TSX: FTS)(NYSE: FTS) second-quarter results, its cash provided by financing activities was $353 million lower compared to Q2 2016. The company is moving forward with a capital expenditure plan totaling about $3.1 billion for 2017.
Dividend-yielding utilities more attractive in this environment
As interest rates remain near all-time lows, even after successive rate hikes, guaranteed income vehicles remain unattractive for investors chasing suitable yields. Fortunately, many Canadian utilities still offer fantastic income combined with years of dividend growth.
Fortis boasts a dividend of $0.43 per share, representing a 3.6% dividend yield. The company has also delivered an astonishing 43 years and counting of dividend growth. The stock has climbed 14.5% in 2017 as of close on October 30 and 8.5% year over year. Shares have increased 42% over a five-year period, making Fortis a solid growth stock. With the capital growth it provides, it is a must-own for investors seeking income.
Hydro One Ltd. (TSX: H) offers a dividend of $0.22 per share with a 3.9% dividend yield. The utility debuted on the TSX in November 2015, but leadership has made it a priority to deliver dividends to its shareholders. The company recently filed a notice of appeal regarding an Ontario Energy Board decision that would see 29% of future tax savings funneled to rate payers. Hydro One has argued that these savings should be paid out to shareholders.
Hydro One stock has declined 4% in 2017 and 7.6% year over year. Provincial controversies and concerns over a ceiling for growth has hurt the stock in recent months. However, with the Avista Corp. acquisition, which will add over 700,000 customers to the Hydro One slate in 2018, I like the stock moving forward for its income and growth potential.
