Utility stocks are traditionally considered safe and reliable. This comes down to their stable dividends in particular. Yet, they may not always be the best investment choice for Canadians seeking higher growth.
Over the past decade, utility stocks on the TSX have shown relatively modest average annual returns of around 6-8%. This is lower compared to sectors like technology or consumer discretionary. Plus, utility companies often face regulatory risks and limited growth prospects, which can cap their potential for significant capital appreciation.
For investors with a long-term horizon, the slow growth and modest returns of utility stocks might not be sufficient to meet their financial goals, especially when compared to the potential higher returns offered by more growth-oriented sectors. And when it comes to utilities, one stock quickly comes to mind.
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Fortis stock
Fortis (TSX:FTS) stock may not be the best choice for dividend investors primarily due to its high valuation metrics and limited growth potential. The stock’s trailing and forward price-to-earnings (P/E) ratios are both above 18, which suggests that the market may already be pricing in much of its future growth. Plus, the company’s price-to-sales (P/S) ratio of 2.54 and price-to-book (P/B) ratio of 1.38 indicate that Fortis is trading at a premium compared to its peers in the utility sector. While these figures are not necessarily alarming, they do raise concerns about the stock’s ability to deliver significant capital appreciation alongside its dividend.
Another factor to consider then is Fortis’s relatively modest dividend yield. With a forward annual dividend yield of 4%, Fortis offers a decent return, but it’s not exceptionally high — especially when compared to other dividend-paying stocks in the utility sector. The company’s payout ratio of 73.20% also indicates that a significant portion of its earnings is being paid out as dividends. This could limit its ability to increase dividends in the future. The high payout ratio, combined with its moderate yield, suggests that Fortis stock may not provide the robust dividend growth that some investors seek.
Lastly, Fortis’s financial health raises some red flags, particularly its high debt levels. The company has a total debt-to-equity ratio of 129%, which is relatively high for a utility company. This level of debt could pose risks as it could strain the company’s ability to finance its operations and pay dividends. These financial concerns make Fortis a less attractive option for dividend-focused investors seeking stable and growing income.
Consider this instead
Investors seeking a strong dividend stock may find Manulife Financial (TSX:MFC) to be a more attractive option than Fortis. This comes down to its favourable valuation metrics and solid financial performance. Manulife’s forward P/E ratio of 9.35 suggests that the stock is undervalued relative to its future earnings potential, especially compared to Fortis, which has a higher forward P/E ratio of 18.25. Furthermore, Manulife’s price-to-book ratio of 1.43 is slightly higher than Fortis’s 1.38. Yet, it remains reasonable for the financial sector, particularly when considering Manulife’s robust revenue growth and profitability.
Manulife also offers a competitive dividend yield of 4.65%, which is higher than Fortis’s at 4%. This yield is supported by a lower payout ratio of 65.11%, indicating that Manulife has more room to maintain and potentially increase its dividend payments in the future. The company’s strong operating cash flow of $23.52 billion further underlines this ability, even amid challenging market conditions.
Moreover, Manulife’s financial strength is highlighted by its significant cash reserves, which total $27.7 billion. Plus, it offers a lower debt-to-equity ratio of 49.60% compared to Fortis’s much higher debt-to-equity ratio of 129%. This lower leverage reduces financial risk and enhances Manulife’s ability to navigate economic downturns, making it a more resilient choice for long-term dividend investors. The combination positions Manulife stock as a superior option for investors looking to maximize their dividend income.
