Is Hydro One Stock a Buy?

Hydro One (TSX:H) stock looks like a low-volatility gem for dividend hunters looking to shelter for safety in April 2024.

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As the chilly winds of market volatility begin to make an appearance on Bay and Wall Street again, many investors may wish to give some of the many low-volatility defensive dividend stocks another look. Indeed, many of them are intriguing value plays that have been overlooked over the past few months and quarters in favour of the more attractive tech plays.

Indeed, there’s more to investing than pursuing the momentum stocks with the biggest and most ambitious near-term generative artificial intelligence (AI) strategies. AI may be a big deal, but that doesn’t mean the firms lacking in AI should be thrown right into the bargain bin.

The case for playing low-volatility value stocks over staying aboard the high-momentum train!

Additionally, AI is going to have to make some money sooner or later, especially in a higher-rate environment. Though the Bank of Canada may be in for a few (maybe three) interest rate cuts this year, investors should be prepared for one or fewer cuts this year. Indeed, commodity prices have been booming of late (have you seen the price of cocoa lately?), which could potentially cause inflation to heat up once again.

In such a scenario, I’d argue that a potential rate pause could be very plausible for 2024. In any case, lower rates seem likely for 2025 and 2026. But until then, central banks should not give inflation even an inch to comeback.

As investors continue to pile into growth AI-driven tech plays, perhaps it makes sense to rotate back into the defensive utility stocks, such as Hydro One (TSX:H). Indeed, you probably won’t score huge gains over the course of a few weeks with such a name, but at the very least, you’ll minimize the chances of a devastating pullback if some of the AI stocks are, in fact, in lofty (even bubbly) territory as we head into May and June 2024.

Compared to most other Canadian utility stocks, Hydro One is quite expensive, with a good amount of momentum behind it. At $38 and change per share, H stock trades at 21.43 times trailing price to earnings (P/E) at the time of writing. The dividend yield is also on the lower end, currently a hair shy of the 3% mark. Though the waters have been quite choppy over the past two years, the trajectory remains higher, with the stock just 6% off its recent March all-time high, just shy of $42 per share.

Is H stock’s multiple worth paying up for?

Indeed, the latest fourth-quarter results saw profits of $181 million. That’s not a bad result, given the high-rate environment. And though it could be difficult to grow, given the high degree of regulatory hurdles facing the firm that continues to benefit from its profoundly impressive monopolistic market positioning, I believe the premium multiple is worthwhile at a time like this.

Call it a scarcity premium, if you will. As the company continues to move slowly (but very steadily) higher, I consider H stock one of my favourite utility plays in the market today. These days, there aren’t many Canadian utility plays that are so close to new highs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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