Although the Canadian equity markets have begun well this year, with the S&P/TSX Composite Index rising 1.8%, uncertainty persists. Investors are skeptical about the impact of Donald Trump’s proposed tariffs on global economic growth. Given this uncertain outlook, investors should look to strengthen their portfolios with quality defensive stocks.
Given their regulated and low-risk businesses, utility stocks’ financials are less prone to market volatility, thus delivering stable returns for investors. Against this backdrop, let’s assess Fortis (TSX: FTS) and Hydro One (TSX: H) to determine a better buy now.
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Fortis
Fortis operates 10 regulated utility assets, serving 3.5 million customers across Canada, the United States, and the Carrebian. With 99% of its assets regulated and 93% involved in low-risk transmission and distribution, it posts stable and predictable financials irrespective of broader market conditions. Its innovative practices to reduce costs and improve operating efficiency have also supported its financial growth.
Supported by these solid financials, the company has delivered an average total shareholder return of 10.3% over the last 20 years, beating the broader equity markets. It has also rewarded its shareholders by raising its dividends for 51 consecutive years and currently offers a forward dividend yield of 4.06%. However, the company’s returns over the last five years have been on the lower side. It has returned around 19% at an annualized rate of 5.3%.
Meanwhile, Fortis expanded its asset base with a projected capital investment of $5.2 billion last year. It also expects to continue expanding its asset base, with the $26 billion capital investment plan spanning between 2025 and 2029 and growing its rate base at an annualized rate of 6.5% to $53 billion. Along with these growth initiatives, favourable rate revisions and cost-cutting initiatives could also support its financial growth in the coming years. The management also hopes to raise its dividends by 4-6% annually through 2029.
Hydro One
Hydro One is a pure-play electric power transmission and distribution company with no material exposure to commodity price fluctuations. The company earns around 99% of its cash flows from rate-regulated assets and long-term contracts, thus shielding its financials from market fluctuations. The company has grown its rate base at an annualized rate of 5% since 2018.
Supported by solid operating and financial growth, the company has returned around 99% in the last five years at an annualized rate of 14.7%. It has raised its dividends at 5% CAGR (compound annual growth rate) since 2017 and offers a forward dividend yield of 2.85%.
Further, Hydro One is continuing with its $11.8 billion capital investment plan, growing its rate base at an annualized rate of 5% through 2027 to $31.8 billion. It has also adopted several cost-cutting initiatives, such as outsourcing certain activities and strategic sourcing, which could deliver productivity savings. Amid these growth initiatives, the company’s management expects its EPS (earnings per share) to grow at 5-7% annually and hopes to raise its dividends at a 6% CAGR.
Investors’ takeaway
The Bank of Canada slashed interest rates four times last year, while the United States Federal Reserve has cut interest rates thrice. Falling interest rates could benefit highly capital-intensive utility companies. Meanwhile, during the past five years, Hyrdo One has outperformed Fortis amid solid financial growth. Due to its higher return potential, investors are ready to pay more, pushing Hydro One’s valuation higher. Its next-12-month price-to-earnings multiple stands at 23.9 compared to Fortis’s 18.2.
Although both companies offer excellent buying opportunities in this uncertain outlook, I am more bullish on Hydro One due to its solid performance in recent years.
