Hydro One (TSX: H) stock has plunged 14.2% in 2018 as of close on August 7. Shares are also down 14% year over year. The company is set to release its second-quarter results on August 14.
The stock has suffered from a new bout of volatility since spring. New Ontario premier Doug Ford vowed to dismiss CEO Mayo Schmidt and the Hydro One board of directors in a bid to reduce costs for citizens. In July, Doug Ford followed through on this promise, as Mayo Schmidt announced his “retirement,” while the board of directors will also depart by August 15. This move sent the stock downward in the days following the announcement.
Political meddling has cast a shadow over what were positive results in the first quarter. The company reported earnings per share of $0.37 compared to $0.28 in the prior year, and the board of directors approved a dividend increase of 5% to $0.23 per share. This represents a 4.6% dividend yield.
Once again, we will ask the question posed in April: Does Hydro One belong in your portfolio today?
Hydro One is a natural target for income investors. The company boasts a wide moat and a very solid dividend yield. However, the stock has declined steadily since late 2016. Its pitiful performance in 2018 has been exacerbated by rate tightening that has punished utilities and other stocks that have been looked to for consistent income since the financial crisis. The Bank of Canada elected to hike rates again this July. Positive economic news for Canada has strengthened the case for one or two more moves in 2018. A potential NAFTA deal before the U.S. midterms could all but guarantee at least one more rate hike this year.
On August 1, the City of Peterborough announced that it had agreed to sell Peterborough Distribution Inc. to Hydro One for $105 million. Before his “retirement,” CEO Mayo Schmidt had declared that Hydro One would be more aggressive in pursuing acquisitions going forward. In July of 2017, Hydro One announced a $6.7 billion deal for the U.S.-based Avista Corp. That merger is expected to be completed by the end of the second quarter.
Going back to the political crisis, there are serious questions investors will need to mull over before betting on Hydro One in August. The PC government is seeking to amend the Ontario Energy Board Act to include a provision that would essentially prevent it from facing litigation; in other words, it will be immune from shareholder reprisal. A number of Bay Street bankers and executives reacted with hostility to the move.
In truth, it is still difficult to predict what form Hydro One leadership will take in the coming months. A positive second quarter could inspire even more doubt in the minds of investors, as the team that has produced the results is on the way out. Hydro One boasts stability and income for prospective buyers, but the growth-oriented strategy pitched by the outgoing team is now in jeopardy, as the Ontario government is seizing back control.
