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.
