Utilities sector stocks are among the biggest Toronto Stock Exchange (TSX) components. Over the years, some utilities have outperformed the TSX year after year, while paying high dividend income. They have provided satisfactory returns with low volatility.
However, there is more to this story than it appears at first glance. Although some well-known utilities have outperformed the TSX, the sector as a whole hasn’t done that well. The TSX Index is up 37% over five years, while the S&P/TSX Capped Utilities Sub-Index is only up 12.3%. Although the TSX utilities index has a high average yield (4.15%), the TSX index overall has a fairly respectable 2.8% yield. That 1.35% yield differential appears unlikely to make up for utilities’ poor price return, which is about one-third that of the index.
Nevertheless, these outperforming individual utilities do exist. What’s more, they’ve been pretty consistently the same companies over time. In this article, I will explore two TSX utilities that may be worth buying in May 2024.
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Fortis
Fortis Inc (TSX:FTS) is a TSX utilities stock and a “dividend king.” A dividend king is a company that has raised its dividend for 50 consecutive years. Fortis acquired the distinction last year.
Fortis has been on an impressive run over the last 10 years. Its stock price has risen 72% in that period while it paid a 4% dividend yield on average. The yield today is 4.2%. If the company can keep up its dividend growth track record, then it will have a higher yield-on-cost in the future.
Can Fortis keep up its dividend growth track record? It’s hard to say with certainty, but the company’s financial trends appear to be similar to those observed in the past. The dividend payout ratio is around 70%, and the debt-equity ratio (1.47) is slightly lower than it was 10 years ago (1.64). However, because interest rates are relatively high right now, Fortis’ debt is incurring much more interest as a percentage of revenue than it did 10 years ago. If rates come down, then I’d expect Fortis stock to really fly. Otherwise, it pays a stable dividend that probably isn’t going anywhere.
Brookfield Renewables
Brookfield Renewable Corporation (TSX:BEPC) is a Canadian renewable energy company that, among other things, operates as a utility. It recently signed a massive agreement to supply Microsoft with 10.5 gigawatts of power. I estimated in a past article that that could bring in $1.4 billion in revenue for Brookfield Renewable. Based on energy prices I found online, I still think that estimate is about right.
Apart from the Microsoft deal, Brookfield Renewable owns a variety of utility operations in the Caribbean and Latin America. The company’s hydroelectric and wind projects are profitable, although it’s still losing money on solar. Brookfield Renewable has grown considerably over the last eight years, having tripled its revenue in that period, and transformed its earnings from a small loss to a $1.8 billion profit. On the whole, this is one renewable power company with a lot of exciting things going on.
It’s worth mentioning that “Brookfield Renewable” is also offered in the form of a fund, Brookfield Renewable Partners. The fund owns a similar asset portfolio as the company, but has a different structure. Notably, BEPC is eligible for the dividend tax credit in Canada.
