Fortis vs Hydro One: Which Utility Stock is a Better Buy?

Utility stocks are perfect for long-term investing. But do you necessarily have to go with the oldest option?

Amy Legate-Wolfe ❯

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest.

Published September 24, 2024 8:00 pm EDT

Utility stocks are a great long-term investment. These provide steady returns and reliability, thus making them a favourite for dividend-seeking investors. For instance, the average annual return for utility stocks has been around 9% over the past 10 years. These typically boast dividend yields between 3% to 4%! That’s significantly higher than the broader market’s average. Plus, with the ongoing shift toward renewable energy, companies in this sector are investing heavily in sustainable practices, positioning themselves for future growth. Yet when it comes to Canadian options, which is the best buy?

Fortis

Fortis (TSX:FTS) is emerging as a strong investment choice, especially after its impressive second-quarter results. The company reported net earnings of $331 million, or $0.67 per share, up from $294 million and $0.61 per share in the same quarter last year. This growth can be attributed to robust performance in Arizona, particularly with new customer rates at Tucson Electric Power and increased electricity sales thanks to warmer weather. The year-to-date figures are equally encouraging, with net earnings of $790 million, reflecting a solid increase in earnings per share. This positive earnings momentum shows that Fortis is not just maintaining its performance. It’s actively growing in a stable and regulated market.

In terms of value, Fortis is well-positioned with a forward price/earnings (P/E) ratio of 18.5, suggesting that the stock is reasonably valued compared to its peers. Additionally, with a forward annual dividend yield of 3.8% at writing, it offers an attractive return to income-focused investors. Furthermore, the company is committed to its $4.8 billion annual capital plan.

Looking ahead, the future outlook for Fortis appears bright, bolstered by its ambitious $25 billion five-year capital plan expected to grow the midyear rate base significantly. With anticipated growth rates of 4–6% in dividends annually through 2028, Fortis is poised to enhance shareholder value. Overall, Fortis combines strong earnings momentum, attractive value, and a promising future outlook – thus making it a compelling option for investors looking for stability and growth in their portfolios.

Hydro One

Hydro One (TSX:H) is shaping up to be a solid investment option, especially with its recent second-quarter results showing impressive earnings momentum. The company reported basic earnings per share (EPS) of $0.49, up from $0.44 in the same period last year, driven by higher revenues from Ontario Energy Board-approved transmission and distribution rates. Founded in 1906 as the Hydro-Electric Power Commission of Ontario, Hydro One’s revenues reached $2 billion, reflecting a significant year-over-year increase. With net income attributable to common shareholders also rising to $292 million, it’s clear that Hydro One is not just keeping pace but is thriving in the utility sector.

When it comes to value, Hydro One presents a compelling case. With a trailing P/E ratio of 25.5 and a forward P/E of 23.3, the stock is priced reasonably compared to its growth potential. The company declared a quarterly cash dividend of $0.3142 per share, translating to a forward annual yield of around 2.6%. This consistency in dividends is attractive for income-seeking investors. Moreover, with capital investments of $818 million during the quarter, Hydro One is clearly committed to enhancing its infrastructure and service reliability.

Looking ahead, the future outlook for Hydro One is promising, especially with significant projects in the pipeline, like the St. Clair Transmission Line Project, expected to cost around $472 million and enhance power reliability in southwest Ontario. Additionally, the successful acquisition of Chapleau Public Utilities Corporation will help integrate assets and potentially further drive revenue growth. Overall, with strong earnings growth, attractive value, and a positive future outlook, Hydro One is an excellent option, especially for those looking to invest in a stable and growth-oriented utility stock.

Bottom line

When it comes to choosing between Hydro One and Fortis as the better investment, it really boils down to your personal preferences and investment goals. Fortis shines with its impressive earnings growth, robust capital plans, and commitment to sustainability, thus making it a solid choice for those seeking stability and long-term gains. On the other hand, Hydro One offers strong revenue growth driven by approved rate increases and a focus on enhancing infrastructure. This can attract those looking for a company with an eye on future expansion. Ultimately, both stocks have their unique strengths, so it’s all about what aligns best with your investment strategy!