With inflation showing signs of cooling down, the equity markets are upbeat, driving the TSX/S&P Composite Index higher. However, economists predict the United States’ GDP (gross domestic product) will grow at 1.2% in 2024, a substantial decline compared to 5.2% in the third quarter. The slowdown could lead to volatility.
Considering the uncertain outlook, investors can strengthen their portfolios with these three quality utility stocks. Given the essential nature of their businesses, the financials of these companies are less susceptible to market volatility.
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Fortis
Fortis (TSX: FTS) operates 10 regulated utility assets and serves around 3.4 million customers, meeting their electric and natural gas needs. With approximately 93% of its assets operating in the low-risk transmission and distribution business, its cash flows are stable and predictable, irrespective of the economic outlook. Supported by its healthy cash flows, the company has raised its dividends for the previous 50 years, with its forward yield at 4.35%.
Meanwhile, the utility company continues expanding its rate base through its $25 billion capital investment plan that spans from 2024 to 2028. Amid these investments, the company’s rate base could grow at an annualized rate of 6.3% to $49.8 billion by 2028. Besides, the company’s management is confident of raising its dividend by 4–6% annually through 2028. Considering Fortis’s solid underlying business and healthy growth prospects, and the visibility of its future dividend growth, I am bullish on it.
Canadian Utilities
Another top utility stock that I am bullish on is Canadian Utilities (TSX: CU), which has raised its dividend uninterruptedly for the previous 51 years. The energy infrastructure company transmits and distributes electricity and natural gas and is also involved in the power production and storage business. Meanwhile, the company sells around 83% of the power produced from its facilities through long-term contracts.
Given its low-risk utility business and regulated power-generating assets, the company’s financials are less susceptible to market volatility. Besides, the utility has lowered its operational and maintenance expenses for electricity and natural gas distribution through operational excellence. Supported by its solid underlying business and improving operational efficiencies, the company has delivered an annualized return of 12.7% for the last 20 years.
Further, Fortis is expanding its regulated utility asset base and has several power-generating facilities in the pipeline. These growth initiatives could boost its financials, thus allowing it to maintain its dividend growth in the coming years.
Hydro One
Hydro One (TSX: H) distributes electricity to 1.5 million customers across Ontario, with its customers living predominantly in rural areas. With 99% of its business being rate-regulated, its cash flows are stable and predictable. Amid these stable cash flows, the company has raised its dividend at an annualized rate of 5% since 2017. It currently pays a quarterly dividend of $0.2964/share, with its forward yield at 3.04%.
Meanwhile, the hydro producer plans to invest around $11 billion over the next four years, growing its rate base at a CAGR (compound annual growth rate) of 6% through 2027. Amid these growth initiatives, the company’s management expects its adjusted EPS (earnings per share) to grow 5–7% annually through 2027. Also, they are confident of raising the dividend at an annualized rate of 6% over the next four years.
Besides, Hydro One’s price-to-earnings multiple of 20.9 looks cheap, given its solid underlying business and healthy growth prospects. Considering all these factors, I believe Hydro One would be an excellent buy right now.
