After a weak ending to last month, Canadian equity markets are upbeat this month, with the S&P/TSX Composite Index rising 1%. Year-to-date, the index is up 16.2%. However, concerns over a global economic slowdown and geopolitical tensions persist. If you are also worried about the uncertain outlook, you can strengthen your portfolios with defensive utility stocks that are less susceptible to market volatility.
Utility stocks are capital-intensive businesses. So, these companies could benefit from the Bank of Canada’s recent interest rate cuts. Against this backdrop, here are my three top utility picks.
Hydro One
Hydro One (TSX:H) is an electricity transmission and distribution company with around 99% of its business rate regulated. It has no material exposure to commodity price fluctuations, so its financials are less susceptible to market volatility. Besides, the company has been expanding its rate base at an annualized rate of 5% since 2018. These expansions have boosted its financials and stock price. Over the last five years, the company has delivered 115.4% returns at an annualized rate of 16.6%.
Further, Hydro One is expanding its rate base with the $11.8 billion capital investment plan, which would extend until 2027. These investments could grow its rate base at a 6% CAGR (compound annual growth rate) to $31.8 billion by 2027. Further, the company has also undertaken several cost-cutting initiatives, including outsourcing specific works and strategic sourcing, which would improve its profitability.
Supported by its healthy growth prospects, Hydro One, which has raised its dividends at an annualized rate of 5% since 2016, is confident of increasing its dividends at an annualized rate of 6% through 2027. Given its low-risk business, consistent dividend growth, and healthy growth initiatives, I believe the company would be an excellent defensive bet.
Fortis
My second pick would be Fortis (TSX:FTS), an electric and natural gas utility company that serves around 3.5 million customers. With 93% of its assets involved in the low-risk transmission and distribution business, the company has been delivering consistent financials and cash flows. These healthy cash flows have allowed it to raise its dividends for 51 years, while its forward yield stands at 4.03%. Also, it has posted an average annual total shareholder return of 10.4% for the last 20 years, outperforming the broader equity markets.
Meanwhile, Fortis plans to invest around $5.2 billion this year, with $3.6 billion already invested by the end of September. Besides, its $26 billion five-year capital investment plan could grow its rate base at an annualized rate of 6.5% to $53 billion by the end of 2029. These investments could continue to drive its financials in the coming years. So, the company’s management is confident of raising its dividends by 4–6% annually until 2029.
Canadian Utilities
Canadian Utilities (TSX:CU), which has been raising its dividends for 52 years, would be my final pick. The company operates a low-risk, rate-regulated electric and natural gas transmission and distribution business, serving around 2 million customers. Its regulated assets generate stable and predictable financials and cash flows irrespective of market conditions, thus permitting it to raise its dividends consistently.
Moreover, the company is expanding its regulated asset base with a $4.3–$4.7 billion capital investment through 2026. These investments could grow its rate base at an annualized rate of 3.5–4.3%. Besides, the company has a solid developmental pipeline of renewable energy projects, with a total power production capacity of 1.3 gigawatts. Given its solid underlying business and healthy growth prospects, I believe CU is well-positioned to maintain its dividend growth. Also, it currently offers an attractive dividend yield of 5%.
