Investing in quality dividend growth stocks is a proven strategy to beat the broader markets and benefit from outsized gains. A company that consistently increases its dividend payout enjoys a widening earnings base and expanding cash flows. In addition to a steady stream of regular dividends, investors should also benefit from long-term capital gains.
One such lucrative TSX dividend stock you can buy today to beat the TSX index is Hydro One (TSX:H). Valued at $24 billion by market cap, Hydro One is among the largest companies in Canada.
Hydro One stock went public in November 2015 and has since returned 85% to shareholders. After adjusting for dividends, cumulative returns are much higher at 152%. Comparatively, the TSX index has returned 118% to shareholders in dividend-adjusted gains in this period.
While past returns don’t matter much, let’s see why Hydro One should outpace the TSX index going forward.
Why should you invest in Hydro One stock?
Hydron One is the largest electricity transmission and distribution provider in Ontario. With roughly $33 billion in total assets, it serves 1.5 million customers and generated revenue of $7.8 billion in 2023.
Hydro One offers investors a low-risk opportunity to participate in the growth of a large-scale, regulated electric utility. It is among the largest electric utilities in North America, with significant scale across Canada’s most populated province. Moreover, the company enjoys one of the strongest investment-grade balance sheets in the North American utility sector.
Hydro One’s unique combination of pure-play electric power transmission and local distribution with no material exposure to commodity prices makes it an enticing investment in the upcoming decade. Further, Hydro One’s stable and growing cash flows, organic growth profile, and expanding rate base should help it outperform its peers and the broader markets.
Hydro One pays shareholders an annual dividend of $1.19 per share, translating to a forward yield of almost 3%. Moreover, these payouts have risen by more than 50% in the last eight years. Hydro One aims to maintain a payout ratio of between 70% and 80%, offering it enough flexibility to reinvest in organic growth, lower balance sheet debt, and raise dividends.
Is Hydro One stock undervalued?
Hydro One forecasts rate base growth at 6% between 2022 and 2027. In 2023, the company invested $2.5 billion in capital expenditures and in-serviced $2.3 billion of assets. Moreover, Canada’s electricity demand is forecast to more than double in the next three decades, which suggests Hydro One’s growth story is far from over.
Similar to other companies, Hydro One has focused on lowering its cost base and achieved savings of $114 million in 2023. Its adjusted earnings are on track to rise by 6% through 2027, translating to higher dividend payouts.
Analysts tracking Hydro One stock expect earnings to expand from $1.81 per share in 2023 to $2.03 per share in 2025. Priced at 20 times forward earnings, Hydro One stock is not too expensive and is positioned to move higher, especially if profit margins improve once interest rates are lowered.
