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Should You Invest in Hydro One Ltd. (TSX:H)?

In the past, I’ve made the point about how the new Ontario government can try to enforce its will on Hydro One Ltd. (TSX:H), but ultimately, the company is no longer a government holding, and while the government could exert some leverage, there are limits.

And while Premier Ford did not actually fire Hydro One CEO Mayo Schmidt, he managed to broker a deal that pushed the CEO to retire and oust the entire board at the company.

Ford’s deal with Hydro One

What the premier has claimed and what has and could transpire in the future after this latest “deal” are up for debate.

Schmidt is walking away from Hydro one with a cool $400,000 payment, which is being given in exchange for any post-retirement benefits. This contrasts the premier’s claim of zero severance.

Additionally, in the event Schmidt is removed from his position by the board, his payment balloons to $10.7 million including severance, but fortunately that wasn’t the case here.

Concerns over executive compensation was only half of the issue that led to voter outrage. The other was growing electricity rates in Ontario, and Ford has claimed that as a result of these executive cuts, rates would drop by 12%.

Moving forward, a new board will include nominees from the province (which remains the largest shareholder), and the new CEO that is selected will need to be endorsed by and have their pay level consulted with the province.

While I’m glad to see rates in Ontario (possibly) dropping by 12%, I’m more concerned with who the successor CEO will be for the company. Hydro One has so far done an incredible job since going public, with the company effectively setting up for years of strong growth and increasing dividends.

The Avista acquisition, with its over 700,000 customers, announced last year is a great example of this. Hydro One’s expansion into the U.S. market has massive potential for future growth, but how will that growth be prioritized with the province of Ontario involved in the running of the company?

What about a provincial buyback?

One common theme that was mentioned during the election was the prospect of Ontario buying back its Hydro One investment and re-nationalizing it. This was one of three options that I floated last month, but it is still the most unlikely.

Buying back Hydro One may sound appealing to investors already invested that could receive a sizable bump over the current stock price, but Ford’s Ontario and populist backing are increasingly looking for what’s best for the province, and a healthy investment and lucrative dividend will do just fine.

Speaking of which, the current quarterly dividend provides a respectable 4.56% yield, which has likely been boosted as a result of Hydro One’s stock dropping 15% over the course of the past year.

Should you invest in Hydro One?

Ontario’s ousting of the CEO and board may result in lower electricity prices for everyday Ontarians, which is a good thing. The fact that prices can come down without significantly impacting Hydro One’s bottom line could be a good thing for investors, too.

Until the current turmoil over executive compensation comes to a rest, Hydro One could be a volatile investment, but overall the company remains a great long-term addition to any portfolio that is currently trading at a discounted price.

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


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