TSX utility stocks have sold off meaningfully roughly over the course of the last year and a half. It has become increasingly challenging to buy and hold these stocks, as interest rates have increased. Some utilities even saw their credit rating get re-rated one notch lower. At the same time, because of the stock market correction, their dividend yields have bumped up. Surely, the dividend income of these utilities offers decent value to investors in a higher inflationary environment.
Here are a couple of utilities that look particularly interesting this month after the recent selloff.
Capital Power stock
Capital Power (TSX:CPX) could be a plausible utility stock to buy this month. It generates resilient cash flows from a portfolio of assets with contracted and merchant power generation. Specifically, it has owned generation of 7,500 megawatts (MW) — about 68% natural gas and 20% renewables. It maintains an investment grade S&P credit rating of BBB-.
Capital Power stock is a Canadian Dividend Aristocrat. For your reference, its five-year dividend-growth rate is 6.9%. And it believes it can continue with dividend growth of about 6% per year through 2025.
It has been trading in a downward channel since May 2022. After dipping over 11% over the last three weeks, it now trades at the bottom of the channel and could provide investors with a trading opportunity.
Importantly, even if investors are required to hold shares in a downturn, it offers an above-average dividend yield of almost 6.7% at $36.72 per share at writing. At this quotation, analysts believe it trades at a meaningful discount of approximately 25%. Notably, the $40-41 range technically acts as a resistance in the short term.
A more defensive utility stock
For a more defensive utility stock, consider Fortis (TSX:FTS). The regulated electric and gas utility has a long track record of dividend growth. Specifically, it has increased its dividend for close to half a century. For your reference, its five-year dividend-growth rate is 6.0%. Management targets to increase its common stock dividend by 4-6% per year through 2028.
Because 99% of its assets are regulated, Fortis’s earnings tend to be stable and predictable. As well, 93% of its assets are for distribution or transmission, which provide essential services through economic cycles.
The stock continues to command a premium price-to-earnings ratio (P/E). However, the valuation is already relatively cheap versus its trading history. The stock’s long-term, normal P/E is about 19.4 times adjusted earnings. At $50.63 per share at writing, it trades at about 16.9 times adjusted earnings. At this quotation, it offers reasonable value and a dividend yield of almost 4.7%. Analysts believe it trades at a discount of about 14%.
Usually, when a market recovery occurs, the first group of stocks that benefit are the quality ones. Surely, Fortis would be one of the top utility stocks to experience a rally then.
Investor takeaway
Between the two utilities, Capital Power may provide a quicker turnaround for the potential of a short-term trade, given the higher volatility of the stock. Fortis is the more blue-chip stock to choose for the most conservative investors looking for a long-term total return of about 9-10% per year.
