Canadian utility stocks have long been known to be boring but reliable investments to make in the stock market. Due to the defensive nature of the industry they operate in, the top Canadian utility stocks tend to negate the broader market movement, whether in bull or bear market conditions.
Typically remaining relatively stable against the broader market movement, utility stocks struggled in 2023 and continued to do so in early 2024.
Central banks in the U.S. and Canada have aggressively hiked key interest rates to cool the red-hot inflation for over a year and a half. While the interest rate hikes have stopped, the impact of higher interest rates has permeated into the utilities sector as well. When borrowing costs are higher, utility companies tend to see increasing interest expenses to contend with.
While stable, these businesses require heavy debt loads to fund capital projects. With loan repayment costs higher than they have been for years, utility stocks saw their share prices drag down in 2023. The question now is: Will utility stocks like Canadian Utilities (TSX:CU) recover this year?
Today, we will look at potential problems for CU stock and whether the current situation makes it a good investment to consider right now.
Canadian Utilities
The Calgary headquartered $6.14 billion market capitalization stock enjoys the defensive moat of long-term contracts in regulated markets to generate revenue.
Analysts have been bullish on stocks in this industry for a long time due to these factors combining with solid demand, creating strong cash flows. However, the persisting inflationary environment might mean central banks will keep key interest rates at elevated levels for longer than anticipated.
Granted, the speculation is there due to worrying consumer reports in the U.S., but the Canadian economy is closely tied to our neighbours down south of the border.
It means the Bank of Canada might follow suit with the U.S. Federal Reserve and keep interest rates high. Higher interest rates will mean bond yields will stay up, leading to more struggles for utilities.
Canadian utility stocks are often regarded as bond proxies due to reliable and consistently growing dividend payouts. While not exactly the same, their consistency with dividends makes companies like Canadian Utilities akin to them.
Foolish takeaway
Rising interest rates and higher bond yields might make utility stocks less favourable for Canadian investors in the short term. However, utility businesses offer much more in terms of long-term benefits for Canadian investors, especially those who might consider the current downturn as an opportunity to capture growth.
Canadian Utilities is the longest-serving and one of the only two Canadian Dividend Kings. It means that the stock has a dividend-growth streak spanning more than five decades. Granted, higher interest rates and bond yields might lead to even lower share prices over the coming weeks and months.
Still, these companies will continue to provide safety to long-term investors from broader market jitters due to the essential nature of the services they provide. Thinking even longer term, exposure to renewable energy in the near future can even deliver more rapid wealth growth as that industry grows.
Canadian Utilities might be facing growth challenges, combating higher interest rates and rising bond yields. However, the long-term potential to deliver safe and reliable wealth growth can make it an attractive investment to consider adding to your holdings, especially when its share price is down.
As of this writing, CU stock trades for $30.03 per share. Down by around a third from its all-time high valuation, it boasts a higher-than-usual 6.04% dividend yield that you can lock into your portfolio today.
