Rising interest rates adversely affect utility stocks, and it’s apparent in today’s high interest rate environment. The sector is the worst performer year to date (-6.37%). Meanwhile, oil prices are currently depressed but could be positive for the sector if they start rising. Utility companies can pass higher energy costs to consumers.
However, notwithstanding the factors mentioned, Fortis (TSX:FTS) and Brookfield Renewable Partners (TSX:BEP.UN) remain safe-haven options for risk-averse investors. Both companies provide essential public services and are reliable dividend payers. Moreover, they continue to outperform the sector and the broader market.
Newly crowned Dividend King
St. John, Canada-based Fortis officially became TSX’s second Dividend King on Sept. 19, 2023. The $27 billion regulated electric and gas utility company announced a 4.4% hike for the fourth quarter (Q4) of 2023 to mark 50 consecutive years of dividend increases. Management also announced a new five-year $25 billion capital plan (2024-2028).
Its president and chief executive officer (CEO), David Hutchens, said the new capital plan is higher than the 2023-2027 plan and is the largest in Fortis’s history. “Our sustainable regulated growth strategy is focused on delivering cleaner energy that remains affordable and reliable for our customers while supporting annual dividend growth of 4-6% through 2028,” said Hutchens.
According to Hutchens, the newest capital plan is low-risk, and has nearly 100% regulated investments. Environmental, social, and governance investors would be happy to know that 27% will go to cleaner energy, connecting renewable to the grid, renewable & storage investments (Arizona and the Caribbean), and cleaner fuel solutions in British Columbia.
With a highly executable capital plan, Fortis’s midyear rate base will rise from $36.8 billion in 2023 to $49.4 billion by 2028 (6.3% compound annual growth rate). The utility firm’s internally generated funds or cash from operations and regulated debt will fund the capital plan.
Fortis isn’t immune to market storms but is resilient because of the strong fundamentals of the regulated energy delivery businesses. In Q3 2023, net earnings increased 20.86% to $394 million versus Q3 2022. On a year-to-date basis (nine months ending Sept. 30, 2023), net earnings climbed 17.65% year over year to $1.1 billion.
It would be unthinkable for the regulated electric and gas utility business to incur losses. If you invest today, the share price is $55.33 (+6.34% year to date), while the dividend yield is 4.27%.
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Strong foundation
Brookfield Renewable Partners is not a Dividend King like Fortis but stands on solid ground. Brookfield Asset Management, one of the world’s largest alternative investment management companies, has a 60% ownership stake.
The $22.7 billion renewable utility company owns a diversified portfolio of energy assets (hydroelectric, wind, solar, distributed energy and sustainable solutions) and operates on five continents. Besides the best-in-class assets and a strong contract profile, high-quality cash flows support the business. The company also has a 150,000-megawatt development pipeline.
Brookfield Renewable Partner’s CEO, Connor Tesky, said the business outlook is as strong as ever. The goal is to deliver 12% to 15% long-term returns to investors. At $34.26 per share (+5.07% year to date), BEP.UN pays a 5.34% dividend.
Low-volatility investments
Future rate hikes are still possible, but the utility sector could turn positive if underlying inflation metrics improve and rate cuts come sooner rather than later. But regardless of the economic environment, expect Fortis and Brookfield Renewable Partners to remain low-volatility investments.
