This past one year has been extremely profitable for investors in utility stocks. After central banks in North America signaled to remain on the sidelines or even cut interest rates, utility stocks became more attractive.
Lower borrowing costs have direct implications for the companies that borrow heavily to fund their development plans. When borrowing costs fall, their margins improve, and so does their ability to increase their dividends.
With many power and gas utilities trading near 52-week highs, it’s a good time to determine if they’re getting expensive. With this theme in mind, here are two top utilities. Let’s see which one offers better value today.
Fortis
In the Canadian utility space, Fortis (TSX: FTS)(NYSE: FTS) has been one of the best-performing stocks. The reason for this strength is that Fortis has a diversified asset base.
The St. John’s-based electricity and gas utility provides 3.2 million customers in the U.S., Canada, and the Caribbean essential services they can’t afford to lose. Its U.S. operations account for about 60% of its regulated earnings, while the rest comes from its Canadian and Caribbean operations.
After remaining under pressure until October, Fortis stock has rebounded strongly, gaining about 17% this year and trading near the 52-week high. With a 3.43% dividend yield and about 6% expected growth in its annual dividend payouts through 2023, Fortis holds strong appeal for income investors.
Between 2006 and 2019, Fortis’s annual distribution increased from $0.67 to $1.80, which was mostly helped by Fortis’s low-risk assets and its regulated utilities.
Algonquin Power
The story with this Ontario, Oakville-based utility is no different. Algonquin Power and Utilities (TSX: AQN)(NYSE: AQN) provides rate-regulated natural gas, water, and electricity services to over 700,000 customers in the U.S. with diversified generation, transmission, and distribution.
Through its clean-energy unit, the company runs a portfolio of long-term contracted wind, solar, and hydroelectric generating facilities, managing more than 1,250 MW of installed capacity. It generates about 70% of earnings from regulated utilities and 30% from contracted renewable power.
Its robust clean-energy operations make Algonquin a more valuable long-term bet at a time when developed nations are working to reduce their carbon emissions.
Algonquin has grown through an aggressive acquisition strategy during the past few years. In its biggest deal so far, the company acquired Empire District Electric, a regulated electric, gas, and water utility with about 200,000 customers, for US$2.4 billion early last year.
Bottom line
With both Fortis and Algonquin trading at expensive levels after their powerful rallies, it’s not an ideal time to buy these stocks. Investors should wait on the sidelines to look for a better entry point. That being said, Algonquin’s 4.5% dividend yield still looks attractive if you compare it with the returns on other assets.
