What Will Happen to Hydro One Ltd. (TSX:H) Now?

Hydro One Ltd. (TSX:H) is once again in the cross-hairs of the government, but can the Conservatives deliver on what they’ve promised?

| More on:
calm, no emotion

With the provincial election in Ontario now over, and the Progressive Conservatives enjoying their first shot at governing in over a decade, all eyes are beginning to turn to what, if anything, will be done with Hydro One Ltd. (TSX:H).

Hydro One was put on the market by the outgoing Liberal administration through several IPO rounds starting back in 2015, bringing in some much-needed revenue for the cash-strapped province. What followed was Hydro One emerging as an incredible investment option, particularly for income-seeking investors, and on the corporate side of the shop, there were acquisitions, sizable growth potential, and executive compensation.

Ontario’s new premier-designate hasn’t been coy about his disdain of the utility — referring specifically to the rates the company charges as well as Hydro One CEO Mayo Schmidt’s $6.2 million pay, even referring to him as the $6 million man. Ford went as far as to make firing the Hydro One CEO one of his key campaign promises to Ontarians.

The only problem is that Ford may not be able to uproot the CEO of a company that the government is now a minority shareholder of.

Here’s a look at the options on the table and how they will impact investors.

Option 1: Buy back Hydro One

For the province to buy back a majority interest in Hydro One would be an expensive order, with a cost in the billions that will not even compare to the measly $6 million salary that Schmidt is currently earning.

A buyback would likely come at an inflated value higher than the current stock price of just over $19, with critics speculating it would be more in the $22-24 range, representing a healthy bump of over 15%, which would put the purchase near the original price of the IPO.

Under this scenario, recent investors would likely benefit from a healthy profit as a result of the bump and continue to reap the impressive dividend until the purchase goes through, which could take several quarters to finalize.

Option 2: Fire the CEO (and reduce board salaries)

There really is no way the premier-designate could go about doing this without first buying back a majority share of the company. Even then, it would be an uphill battle in boardrooms that could go on for months that could cause unnecessary turmoil in the stock, which wouldn’t be good for anyone.

Responding to investor concerns on the matter last month, Schmidt noted that the province is a “shareholder, not a manager of the business.”

While the premier-designate was clearly in campaign mode during his outbursts on Hydro One, the truth of the matter is that Hydro One is no longer a government-owned company and is now operating and rewarding its executives like any other major utility on the continent.

Added to that list is Hydro One’s governance agreement with the province that states, among other things, that the province has to remain in its role as a shareholder and not interfere in the day-to-day running of the business, which includes its management.

Simply stated, it’s in Hydro One’s best interest to attract the best possible leadership, and that means paying them well whether the province likes it or not.

Option 3: Do nothing (at least nothing concrete)

This is beginning to emerge as what will likely happen for several reasons.

First, the costs of buying back (if at all possible) are nearly prohibitive considering the province is already in debt to the tune of over $345 billion. To put it another way, every Ontarian would need to shell out just over $25,000 to Queens Park to get out of debt, which will only continue to go up.

Finally, the province still maintains a 40% interest in Hydro One, which provides a mind-boggling amount of dividends to the province. That would end in a buyback scenario or, even worse, become a one-time injection if the province went the other way and sold all of its remaining holdings in the company.

Irrespective of what happens with Hydro One it will take time. Until then (and possibly beyond) investors will continue to benefit from an appetizing dividend and a stable and growing business.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Demetris Afxentiou has no position in any stocks mentioned.  

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

2 Top TSX Stocks to Put on Your TFSA Buy List

TFSA investors are searching for undervalued TSX stocks to buy that have the potential to deliver big gains in 2022. …

Read more »

Payday ringed on a calendar
Dividend Stocks

Get Unbelievable Monthly Income With High-Yield Dividend Stocks

The only thing better than a dividend stock is a stock that pays dividends every month. For people who live …

Read more »

gas station, convenience store, gas pumps
Dividend Stocks

1 Key Catalyst Investors in Couche-Tard Stock Need to Watch

One of the top value stocks on the TSX, Alimentation Couche-Tard (TSX:ATD) has been a strong performer over the past year. …

Read more »

Value for money
Dividend Stocks

2 Top Value Stocks I’m Looking to Buy Right Now

Value investing is a lot more than just grabbing stocks that look inexpensive. The shares of an organization in permanent …

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

RRSP Investors: 2 Top Canadian Dividend Stocks to Buy for Total Returns

Canadian savers are searching for good TSX stocks to buy inside their self-directed RRSP that pay reliable dividends and can …

Read more »

Cogs turning against each other
Dividend Stocks

2 Dividend Stocks That Could Stabilize Your TFSA During a Market Correction

A common strategy for investing during a market downturn is to allocate a greater proportion of your portfolio towards dividend …

Read more »

Close up shot of senior couple holding hand. Loving couple sitting together and holding hands. Focus on hands.
Dividend Stocks

3 Top Passive-Income Stocks for Canadian Pensioners

Canadian retirees are searching for quality dividend stocks to buy insider their TFSA to generate reliable and growing passive income. …

Read more »

Dividend Stocks

2 Top Dividend Stocks to Buy Today

Dividend investing is one of the best approaches to stock market investing with a long-term view. Allocating a significant portion of …

Read more »