The utilities sector is among the first places long-term investors go to gain higher-than-average yields in the market, alongside long-term capital appreciation. These companies provide capital to an essential industry, generating cash flow growth over time, which is passed onto investors in the form of higher dividends. That said, not all such companies are no-brainer utility stocks worth buying. There are value traps out there and companies that don’t allocate capital as efficiently as others.
That said, the TSX hosts some of the best utility companies in the world. Here are two I’ve focused intently on over the years that I think have the ability to continue to surge over the long haul. For those with an extra $1,000 lying around, these are two stocks I think are worth considering at current levels.
Fortis
One stock that is screaming right now in the Canadian market is Fortis (TSX: FTS). More than 3.4 million consumers in Canada and the U.S. get gas and electricity from Fortis’s 10 utility transmission and distribution networks. Additionally, the company is heavily involved in providing utilities and power generation services in the Caribbean. ITC manages the maintenance of more than 16,000 miles of high-voltage power lines that transmit power throughout seven states in the United States. So, from a geographical perspective, this is a company that’s reasonably diversified, with a focus on the Canadian market.
Notably, Fortis is moving quickly in the direction of greener energy. In comparison to 2019 levels, the company aims to reduce their direct greenhouse gas emissions by 50% by 2030 and a staggering 75% by 2035. They won’t stop there, though. By 2050, they want to have achieved net-zero direct greenhouse gas emissions. This demonstrates their commitment to turning green over the long term while maintaining a high standard of dependability and affordability.
With a current dividend yield of 4.2% and a stock price that still seems reasonable after its recent run-up, I think Fortis is a stock worth buying on every dip moving forward.
Brookfield Renewable Partners
Brookfield Renewable Partners (TSX: BEP.UN), as its name suggests, produces renewable energy throughout North America, Europe, Asia, Brazil, and Colombia, among other places in the world. Sunlight, wind, water, and plants are used to generate energy, which is then stored and distributed to consumers.
The company’s funds from operations (FFO) per share growth has recently come in at around 7%, below its annual objective of over 10%. However, this decline was mostly due to some acquisitions that did not close as rapidly as anticipated in the latter part of the year. I believe this setback will reverse and support the company’s expansion beginning in 2024 and continuing ahead.
The company believes that it can grow its free cash flow (FFO) per share by more than 10% until at least 2028. It wants to do this by increasing profit margins, working on large development projects, taking advantage of rising power costs in line with inflation, and engaging in strategic mergers and acquisitions. The company just struck a significant agreement with Microsoft to explore sustainable energy sources over the ensuing years. This is the largest direct power sales arrangement it has ever had with a major corporate partner.
Given its promising future, Brookfield Renewable plans to raise its dividend to stockholders by 5-9% annually. At the moment, the dividend yields around 5.8% of the company’s stock price. Given that earnings are expected to expand by more than 10% a year, investors may realize annual returns of over 15%. That’s my base case moving forward, at least.
