Utility stocks are a very reliable and steady way to earn passive income during times of market turmoil. Fortis (TSX:FTS) and Brookfield Infrastructure Partners (TSX:BIP.UN) are two well-known Canadian stocks with strong utility businesses.
While these stocks have highly defensive qualities, they have differing elements of risk, growth, income, and opportunities. Here’s why I might consider buying one over the other today.
Fortis: A slow but steady stock cranking out a good dividend
Fortis is undoubtably one of Canada’s most defensive stocks. It operates 10 regulated utilities across North America. 99% of its business is regulated, which means it earns a very consistent baseline of earning.
Fortis largely operates transmission and distribution assets. These are economically essential to the geographies they serve. Fortis really has no competitors, so demand for its services is perennially persistent.
Over the past five years, its stock has earned a 55% total return (including dividends). That comes to a 9.1% average annual return. Over 10 years, its average returns come closer to 8%, but that is still pretty good.
It has a capital plan where it expects to deploy around $4 billion a year into relatively low risk, highly achievable projects. It expects to grow by around 6% a year for the coming five years. The company has a strong balance sheet with long-dated debt, so this plan appears achievable.
Fortis stock yields 4% today. It hopes to continue its long-standing dividend-growth tradition (49 years of consecutive increases) with a target of 4-6% a year for the coming five years. Overall, it’s a great business with a great track record that income investors shouldn’t ignore.
Brookfield Infrastructure: Diversified and growing
Brookfield Infrastructure Partners has a significantly more diversified business than Fortis. It operates railroads, ports, toll roads, utilities, home service businesses, pipelines, midstream plants, cell towers, and data centres.
Its diversity across sectors and geography provides an economic hedge. When one area struggles, generally another is outperforming. Over 85% of these businesses are regulated or contracted, so it too has a steady baseline of earnings. Likewise, 75% of these businesses have contractual inflation-indexed earnings. This has helped the company deliver above average cash flow growth.
Over the past five years, Brookfield Infrastructure stock has underperformed Fortis. It has earned a 42% total return. That is a 7.3% average annual total return. However, over 10 years, it delivered a 230% total return (or 12% average annual return). That nearly doubled Fortis’s 10-year total returns.
Today, Brookfield’s stock trades at 13 times adjusted funds from operation (AFFO) per share. That is at the low end of its five-year average of 16.2 times. Fortis on the other hand trades for 18 times AFFO, which is actually above its five-year average of 16 times. Brookfield also trades with a higher dividend yield of 4.6% (versus 4%).
Brookfield Infrastructure’s dividend growth has been around 6% over the past few years. It has a decade-plus history of consecutively growing its dividend (albeit not nearly five decades like Fortis).
The company has a strong balance sheet with excess liquidity to deploy into acquiring more assets. Given the potential for a recession, it could see some bargain opportunities in the next few years. That could provide a solid opportunity for earnings growth.
Fortis or Brookfield Infrastructure stock?
While both Fortis and Brookfield Infrastructure are really solid utilities to own for passive income, my bet is to go with Brookfield. While it might be a little risky given its diversification, it appears to have longer-term growth opportunities (both organically and by acquisition).
After Brookfield’s stock has fallen in 2023, it trades with a higher yield and a lower valuation. Both are defensive stocks, but my bet for the long term is Brookfield Infrastructure.
