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Why Hydro One Ltd. Is up About 1%

Hydro One Ltd. (TSX:H), Ontario’s largest electric transmission and distribution company, is up about 1% at the open of trading today following the release of its fourth-quarter and full-year earnings results earlier this morning. Let’s break down the quarterly results, the annual results, and the fundamentals of its stock to determine if we should be long-term buyers today.

Breaking down the financial results

Here’s a quick breakdown of eight of the most notable statistics from Hydro One’s three-month period ended December 31, 2017, compared with the same period in 2016:

Metric Q4 2017 Q4 2016 Change
Revenues $1,439 million $1,614 million (10.8%)
Purchased power $662 million $858 million (22.8%)
Revenues, net of purchased power $777 million $756 million 2.8%
Adjusted net income attributable to common shareholders $170 million $128 million 32.8%
Diluted adjusted earnings per share (EPS) $0.28 $0.21 33.3%
Net cash from operating activities $523 million $474 million 10.3%
Transmission: Average monthly Ontario 60-minute peak demand (megawatts) 18,946 19,415 (2.4%)
Distribution: Electricity distributed to Hydro One customers (Gigawatt hours) 6,784 6,521 4.0%

And here’s a breakdown of eight of the most notable statistics from its 12-month period ended December 31, 2017, compared with the same period in 2016:

Metric Fiscal 2017 Fiscal 2016 Change
Revenues $5,990 million $6,552 million (8.6%)
Purchased power $2,875 million $3,427 million (16.1%)
Revenues, net of purchased power $3,115 million $3,125 million (0.3%)
Adjusted net income attributable to common shareholders $694 million $721 million (3.7%)
Adjusted EPS – diluted $1.16 $1.21 (4.1%)
Net cash from operating activities $1,716 million $1,656 million 3.6%
Transmission: Average monthly Ontario 60-minute peak demand (megawatts) 19,587 20,690 (5.3%)
Distribution: Electricity distributed to Hydro One customers (Gigawatt hours) 25,876 26,289 (1.6%)

What should you do with Hydro One today?

Hydro One posted a solid fourth-quarter performance, highlighted by double-digit percentage earnings growth, so I think the positive reaction in its stock is warranted. However, I cannot help but notice that its full-year results were littered with year-over-year declines, so I would not be surprised if the rally fades. With all of this being said, I think the stock represents a good opportunity for long-term investors for two fundamental reasons.

First, it’s attractively valued. Hydro One’s stock currently trades at just 17.8 times fiscal 2017’s adjusted EPS of $1.16 and only 16 times the consensus analyst EPS estimate of $1.29 for fiscal 2018, both of which are inexpensive given the low-risk nature of its business model and its strong cash flow-generating ability.

Second, it has a high and safe dividend yield with room for growth. Hydro One currently pays a quarterly dividend of $0.22 per share, equal to $0.88 per share annually, which gives it a lavish 4.3% yield. It’s also worth noting that the company’s 4.8% dividend hike last May has it on track for 2018 to mark the second consecutive year in which it has raised its annual dividend payment, and I think it could continue to grow its dividend at a steady rate over the next several years.

With all of the information provided above in mind, I think Hydro One is a solid long-term buy today, but I must add that I prefer Fortis Inc. (TSX:FTS)(NYSE:FTS) at current levels.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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