Valued at $24.8 billion by market cap, Hydro One (TSX:H) is among the largest companies in Canada. Shares of Hydro One went public in November 2015 and have since surged over 90%. After adjusting for dividends, total returns are much higher at 158%. Comparatively, the TSX index has returned 112% since Hydro One’s IPO (initial public offering).
Let’s see if Hydro One stock can continue to outperform the broader indices in 2024 and beyond.
An overview of Hydro One
Hydro One is one of the largest electrical utilities in North America, with a significant scale and leadership position in Ontario. It offers a unique combination of electrical transmission and local distribution with no power generation assets. The company operates in a stable, transparent, and rate-regulated environment, allowing it to generate cash flows across business cycles.
A predictable stream of cash flows enables Hydro One to pay shareholders an annual dividend of $1.19 per share, translating to a forward yield of 2.9%. With a payout ratio of between 70% and 80%, Hydro One has enough room to reinvest in growth projects, lower balance sheet debt, and target accretive acquisitions.
Basically, Hydro One has a predictable growth profile and should expand the rate base consistently under a multi-year approved capital investment program.
Armed with an investment-grade balance sheet, Hydro One is positioned to deliver stellar returns among utility peers.
How did Hydro One perform in Q4 of 2023?
In the fourth quarter (Q4) of 2023, Hydro One reported adjusted earnings of $0.30 per share, which is in line with Q4 of 2022. For the full year, its earnings rose to $1.81 per share in 2023, up from $1.75 per share in 2022. The key driver of earnings for 2023 was higher revenues due to OEB (Ontario Energy Board) approved rates.
Similar to other capital-intensive companies, Hydro One continued to wrestle with higher costs in the past year. However, it achieved $114 million in productivity savings in 2023 on the back of increases in productivity across verticals such as operations and supply chain management. These savings were weighted slightly more towards capital than revenue.
In 2023, Hydro One placed $2.324 billion of assets in service for customers, an increase of 2.5% year over year, primarily due to higher distribution in service additions.
In terms of capital investments, Hydro One invested $745 million in Q4, an increase of 30.7% year over year. The increase resulted from its transmission and distribution segments, which were driven by higher volumes of customer connections and investments in new transmission lines.
In 2023, Hydro One’s capital investments totalled $2.5 billion, an increase of $400 million, or 18.7%, compared to 2022.
Is Hydro One stock undervalued?
Analysts expect Hydro One to increase adjusted earnings from $1.81 per share in 2023 to $1.9 per share in 2024. In the next five years, its earnings are forecast to expand by 5.8% annually. So, priced at 21.8 times forward earnings, Hydro One might seem expensive.
Alternatively, Hydro One’s capital program should expand its rate base and raise future cash flows, earnings, and dividends.
