Hydro One (TSX:H) operates a highly regulated electricity transmission and distribution business, serving 1.5 million customers in Ontario. Its financials are less susceptible to market volatility, given a 99% rate-regulated utility business and no exposure to commodity price fluctuations. Supported by these solid financials, the company has delivered over 133% returns in the last five years at an annualized rate of 18.5%. Besides, the company’s stock price is up 18.4% this year, outperforming the broader equity markets. Let’s assess buying opportunities in the stock by looking at its recent second-quarter performance and growth prospects.
Hydro One’s Q2 performance
Hydro One reported revenue of $2 billion during the second quarter, representing a 9.4% increase from the previous year. However, its revenues, net of purchased power, grew 3% to $1.1 billion amid favourable rate revisions and higher demand. Meanwhile, its OM&A (operation, maintenance, and administration) expenses fell 5.1% year-over-year amid lower work program expenditures.
However, the company’s financing charges increased by 9% amid higher weighted average interest rates and average debt levels. Its depreciation, amortization, and asset removal expenses also rose as the company continued to put assets into service amid its ongoing capital investment program and increased asset removal expenses. Meanwhile, the company reported EPS (earnings per share) of $0.49 for the quarter, representing an 11.4% increase from the previous year. Besides, it increased its operating credit facilities by $750 million to $3.3 billion on June 1 to increase its liquidity and provide additional financial flexibility.
Now, let’s look at its growth prospects.
Hydro One’s growth prospects
Electricity demand is rising due to a growing population, rising awareness about air pollution, corporate ESG (environmental, social, and governance) targets, and government policy changes. Meanwhile, the company projects Canada’s electricity demand could grow by 120–135% between 2021 and 2050, thus expanding Hydro One’s addressable market.
Meanwhile, the company has made a capital investment of $1.5 billion in the first two quarters while putting $766 million worth of projects into service. It plans to continue its $11.8 billion capital expenditure plan (spanning from 2022 to 2027), thus growing its rate base at an annualized rate of 6% until 2027. Besides, the company has adopted cost-cutting initiatives, including outsourcing certain activities and strategic sourcing initiatives, which could continue to deliver productivity savings, thus improving its profitability. Meanwhile, the management projects its EPS to grow by 5–7% annually through 2027. Considering all these factors, I believe the company’s growth prospects look healthy.
Dividends and valuation
Given its low-risk, rate-regulated utility business, Hydro One generates stable and predictable cash flows irrespective of broader market conditions. Supported by these healthy cash flows, the company has raised its dividends at an annualized rate of 5% since 2016. It currently pays a quarterly dividend of $0.3142/share, with its forward yield at 2.7%.
Amid the uptrend in its stock price, Hydro One trades at 3.3 and 24.8 times analysts’ projected sales and earnings for the next four quarters. Given its low-risk business and healthy growth prospects, investors are ready to pay a premium, increasing its stock price.
Investors’ takeaway
This month, the global equity markets have turned volatile amid weak economic data from the United States, raising global slowdown concerns. Amid the volatility, I believe Hydro One could stabilize your portfolio and generate a stable passive income. Besides, given its capital-intensive business, the company could benefit from the Bank of Canada’s monetary easing initiatives. Considering all these factors, I believe Hydro One would be an excellent buy now despite the uncertain market environment.
