3 TSX Utility Stocks to Buy Hand Over Fist in May

Given their stable cash flows and healthy growth prospects, these three utility stocks are excellent buys right now.

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Although the broader equity markets have bounced back strongly this month, concerns over inflation, the impact of geopolitical tensions, and higher interest rates persist. Given the uncertain outlook, investors should look to strengthen their portfolios with defensive stocks, such as utility stocks. Although the sector has been under pressure over the last two years amid a higher interest rate environment, I believe the correction has provided enticing buying opportunities in the following three stocks.

Fortis

First on my list would be Fortis (TSX:FTS), which serves 3.5 million customers in the United States, Canada, and the Caribbean Islands. With around 100% of its assets regulated, the electricity and natural gas transmission and distribution company earns stable cash flows irrespective of the broader economic outlook. Supported by stable cash flows, the company has raised its dividends for 50 consecutive years, with its forward yield currently at 4.22%.

After already spending $1.1 billion in the first quarter, Fortis is on track to make a capital investment of $4.8 billion this year. Besides, it plans to invest around $20 billion from 2025 to 2028, thus expanding its rate base at an annualized rate of 6.3% through 2028 to $49.4 billion. An expanding rate base and favourable rate revisions could boost its financials in the coming years. So, the company’s management expects to raise dividends by 4 to 6% annually through 2028. Considering all these factors and its attractive NTM (next 12 months) price-to-earnings multiple of 17.3, I am bullish on Fortis.

Hydro One

Second on my list would be Hydro One (TSX:H), which transmits and distributes electricity to 1.5 million customers across Ontario. With around 99% of its revenue from rate-regulated assets and no material exposure to commodity prices, the company earns stable and predictable cash flows, irrespective of the market conditions. Supported by these healthy cash flows, the company has been raising its dividends uninterruptedly since 2016. Currently, the company offers an annualized dividend of $1.25/share, translating into a forward yield of 3.1%.

Meanwhile, Hydro One has planned to invest $11 billion from 2024 to 2027. These investments could grow its rate base at a CAGR (compound annual growth rate) of 6% through 2027 to $31.8 billion. Amid these growth initiatives, the company’s management expects its EPS (earnings per share) to grow at an annualized rate of 5 to 7% over the next four years. So, I believe the company is well-positioned to continue its dividend growth in the coming years, thus making it an ideal buy.

Emera

My final pick would be Emera (TSX:EMA), which operates cost-of-service rate-regulated electric and natural gas utility assets in the United States, Canada, and the Caribbean. It is also involved in renewable energy production, with a total installed capacity of 1.65 gigawatts. Its rate-regulated utility assets provide stability to its financials, thus allowing the company to raise its dividends for 17 consecutive years. It currently pays a quarterly dividend of $0.7175/share, with its forward dividend yield at 5.82%.

Meanwhile, the company has planned to invest around $8.9 billion from 2024 to 2026, with an additional potential capital investment of $2 billion during the same period. These investments could expand its rate base at an annualized rate of 7 to 8% through 2026. Amid these growth initiatives, the company expects to raise its dividends by 4 to 5% annually through 2026. Considering its growth prospects, high dividend yield, and attractive NTM price-to-earnings multiple of 15.1, I am bullish on Emera.

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool recommends Emera and Fortis. The Motley Fool has a disclosure policy.

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