Hydro One (TSX:H): Hold to Collect Defensive Income Streams

One of the TSX’s prominent utility stocks reported lower earnings in 2021 but will continue to deliver defensive cash flow streams to investors.

| More on:

Utility stocks are usually low-priority investments when the economic condition is stable. However, when volatility begins to emerge, or a market downturn looms, they are the safety nets of frightened investors. Such is the investment thesis for Hydro One (TSX:H).

The $20.61 billion premium large-scale utility company distributes electricity to end users in Ontario. Despite the slight decline in revenue (-0.9%) and sharp drop in net income (-45.5%) in 2021 versus 2020, you’d rather hold the stock than sell it.

Hydro One boasts a very stable business model and enduring operations. Even if a bear market or stagflation comes, you are sure to collect defensive income streams. The current share price of $34.63 is worth it, while the 3.10% dividend is safe.

Regulated business

Like most utility companies, Hydro One produces reliable cash flows, because the electric distribution business is rate regulated. The company operates under the Ontario Energy Board’s (OEB) Custom IR framework, and it owns 98% of Ontario’s transmission capacity.

Some market analysts say geographic limitation is a drawback for Hydro. However, it might not be so since the planned annual capital investments of $670 million to $1.14 billion until 2027 assure a growing rate base. Also, increasing system requirements and emerging industries should help drive the expansion of Hydro’s transmission network.

From 2022 to 2027, management projects the rate base to grow to $31 billion (6% CAGR). Currently, the combined transmission and distribution rate base is $23.6 billion. The organic growth from the continuing rate base expansion covers the replacement of aging infrastructure and grid modernization.     

Lower earnings in 2021

After 2021, Mark Poweska, president and CEO of Hydro One, said, “As we emerge from the pandemic, we will continue to support economic recovery and growth by investing in a grid for the future and enabling electrification … Hydro One strives to improve the experience of our customers through providing excellent service, improving reliability and by building a more sustainable and resilient grid.”

In the year ended December 31, 2021, net income declined to $965 million from $1.77 billion in 2020. However, adjusted net income rose 6.9% year over year. Also, $1,75 billion worth of assets went into service compared to the $1,63 billion from the previous year.

Hydro One’s immediate concerns are addressing the aging power system infrastructure and facilitating connectivity to new load customers and generation sources.

Pilot program

In tandem with Peak Power, Hydro One launched a new pilot program as part of its plan to build a grid for the future. The partners will study the benefits of using electric vehicle charging technology to improve power resiliency and reliability for customers.

According to management, the two-way Vehicle-to-Home (V2H) charging technology has the potential to support the shift to electrification and a low-carbon economy for customers in Ontario.

Defensive asset

Hydro is best for income investors seeking defensive assets to mitigate market risks. Expect sustainable dividend payouts for years, given the company’s predictable growth profile and multi-year capital-investment program to grow the rate base. 

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

concept of real estate evaluation
Dividend Stocks

Why the Market Should Stop Hating on This Reliable REIT

You can get a lot of dividend income with an investment in Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Max Your TFSA Impact: 4 Dividend Stocks to Buy and Hold Forever

Adding these TSX dividend stocks to your TFSA can maximize your portfolio's income potential and compound your returns over time.

Read more »

man touches brain to show a good idea
Dividend Stocks

This 6% Yield Has Survived Every Market Crash Since 1995

This top TSX stock boasts a yield of over 6% and a dividend track record that has weathered every market…

Read more »

Income and growth financial chart
Dividend Stocks

This Canadian Retail Stock Yields 3.8% and Keeps Expanding

A growing dividend, rising share price, and big strategic moves make this top Canadian retail stock worth owning for the…

Read more »

Forklift in a warehouse
Dividend Stocks

It’s Possible! Build a $250,000 TFSA Using Just 2 Dividend Stocks

Want a $250,000 TFSA that pays out monthly? These two solid REITs pay monthly distributions.

Read more »

Two senior friends playing beat tennis on sand tennis court
Dividend Stocks

2 Canadian Stocks to Buy and Hold for a Lifetime

These Canadian stocks have the strength to reward patient investors for decades – no matter what the market brings.

Read more »

resting in a hammock with eyes closed
Dividend Stocks

1 Canadian Utility Stock That’s My Ultimate Sleep-Well-At-Night Pick

Its defensive business and predictable earnings position it to deliver steady, long-term returns, helping you sleep well at night.

Read more »

A worker uses a laptop inside a restaurant.
Dividend Stocks

Dream of Owning a Restaurant? These 2 Food Stocks Are a Far Savvier Investment

Kitchen nightmares exist for a reason. These TSX restaurant royalties are better picks.

Read more »