Many economists believe the Canadian economy is resilient, although a recession in 2023 is inevitable. For stock investors, don’t expect a rebound yet, because the rocky market from last year will likely extend. The best strategy to endure the headwinds is to remain cautious and seek safety in a defensive sector.
Emera (TSX:EMA) and Hydro One (TSX:H) are ideal options for risk-averse investors. Besides offering capital protection, the two utility stocks are Dividend Aristocrats. Emera has raised its dividend for 15 consecutive years, while Hydro’s One dividend-growth streak is now six years. The dividend payments should be rock steady, regardless of the economic environment.
Well positioned for change
Emera started as a single electric utility company before transforming into a multinational energy holding company. The $14.47 billion company currently has 10 regulated companies and investments in two unregulated companies. If you’re investing today, the share price is $53.94 (+4.23% year to date), while the dividend yield is a juicy 5.21%.
The rate-regulated businesses in jurisdictions (concentration in Florida and Nova Scotia) with generally stable regulatory policies and economic conditions are competitive advantages. Because of them, Emera provides reliable earnings, steady cash flows, and uninterrupted dividends.
In the nine months ended September 30, 2022, operating revenues and net income increased 34.2% and 128.7% year over year to $5.23 billion and $510 million, respectively. According to management, Emera has a capital-investment plan of $8 billion to $9 billion from 2023 to 2025. It forecasts the rate base to grow by around 7-8% within three years.
The good news to current and prospective investors is the annual dividend-growth guidance of 4-5% through 2025. Emera targets a long-term dividend-payout ratio of 70-75% of adjusted net income. However, sales volumes and operating expenses can sometimes impact earnings, and seasonal patterns and other weather events could also affect demand and operating costs.
Management is fully aware of the significant change that energy markets worldwide face. Still, it’s confident that Emera can respond to shifting customer demands, regulatory environments, and decentralized generation. The company is also ready for digitization and decarbonization.
Predictable growth profile
Hydro One has operated for more than a century and is now Ontario’s largest electricity transmission and distribution service provider. The $22.3 billion company distributes electricity to end users in the province, including the rural areas. At $37.26 per share (+2.73% year to date), you can partake of the decent 3.04% dividend yield.
Like Emera, Hydro One operates in a stable, transparent and collaborative rate-regulated environment. After three quarters in 2022, revenue and net income rose 8.7% and 8.2% to $5.91 billion and $872 million versus the same period in 2021. Management takes pride in Hydro’s investment-grade balance sheet, which it considers the strongest in the utility sector.
Hydro One will bank on a three-year, $5 billion investment plan to expand the rate base further and confirm its predictable growth profile. It should result in more attractive dividend yields for shareholders.
Recession is unavoidable
BMO’s chief economist Douglas Porter said a recession is unavoidable when interest rates are rising fast, like in recent months. Fortunately, investors have ways to mitigate risks and endure a rocky market.
