There is no denying that significant variation can exist within a sector, even stable and well-defined ones like utilities.
These differences may hail from a number of factors, including business model, geography of operations, and characteristic strengths and weaknesses. But there are also significant similarities among the stocks of the same sector. Like most utility companies tend to have low-volatility stocks.
Understanding both the similarities and the differences (as well as the potential for differences) is critical when choosing between two stocks from the same sector.
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An Ontario utility company
Hydro One (TSX: H) is an Ontario utility company that is not only based in Ontario but operates almost exclusively in the province, catering to the electricity needs of its rural residents. The company has a massive asset base and caters to about a quarter of customers available in Ontario (roughly 1.5 million homes and businesses).
It has a predominantly rural customer base, which has drawbacks. The hydro power provider requires more infrastructure and maintenance compared to utility companies that operate in urban areas because of a higher population density and more consumers/billpayers per unit of assets.
In contrast, Hydro One’s transmission lines, which cover roughly 75% of the province in terms of distribution network, only cater to about a quarter of the total consumers available.
However, this has its benefits as well. There is little to no competition and the consumers tend to stay put (consistent financials). This competitive edge has facilitated decent stock growth in the past and about 78% in the last five years alone. The company also pays dividends and the current yield is at 2.8%.
An international utility company
Fortis (TSX: FTS) is easily one of the top stocks in the country and certainly one of the most prominent dividend stocks. That’s mainly because of its stellar dividend history.
The company has been raising its payouts for 49 years, and it’s merely months away from becoming the second dividend king of the country. The dividend yield is decent as well, at 4.1%, making Fortis a dividend stock found in the majority of Canadian dividend/passive income portfolios.
It also has a compelling user base and business model. The company caters to about 3.5 million customers (both electricity and natural gas) and has multiple operations and a sizable geographic footprint (including the US and Caribbean).
The only area where Fortis falls a bit short in comparison is the growth potential. The stock only grew by about 7.5% in the last five years and its 10-year growth of 71% is more comparable to Hydro One’s 5-year growth.
Foolish takeaway
Both Fortis and Hydro One are good picks for different kinds of investors. If your primary goal is to capture as much capital appreciation potential as possible, Hydro One might easily be the better buy.
But if you are looking for solid dividends, a better yield, and decent long-term growth potential, Fortis might have an edge. It also offers slightly better value than Hydro One right now. But the ultimate choice depends on what you are looking for in your utility stock.
