Utility companies provide essential services, including meeting the electric, natural gas, and water needs of their customers. Given the crucial nature of their business, public authorities regulate these companies. Therefore, these companies deliver stable and reliable financial results, irrespective of economic cycles, thereby providing consistent returns.
Although Canadian equity markets have rebounded strongly from their April lows, concerns over global growth persist amid protectionist policies. Given the uncertain outlook, these utility companies with reliable returns would be ideal buys right now. Against this backdrop, here are my three top picks.
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Fortis
Fortis (TSX:FTS) is one of my top picks due to its highly regulated utility business and healthy growth prospects. The company operates 10 utility assets, serving 3.5 million customers in the United States, Canada, and the Caribbean, meeting their electric and natural gas needs. Given its regulated asset base and low-risk transmission and distribution business, the utility’s financials are less prone to commodity price fluctuations and economic cycles. Supported by these reliable financials, Fortis has delivered returns of over 620% in the last 20 years at an annualized rate of 10.4%. Additionally, FTS stock has increased its dividends uninterruptedly for 51 years and currently offers a reasonable dividend yield of 3.8%.
The utility company continues to expand its low-risk, regulated utility assets with a five-year capital investment plan of $26 billion, spread over the period from 2025 to 2029. The company projects that it will meet 70% of these investments through funds generated from its operations and dividend reinvestments. So, these investments won’t substantially raise the company’s debt levels. Further, the company could also benefit from customer rate hikes and improving operating efficiency. Amid these growth prospects, Fortis’s management expects to raise its dividends by 4–6% annually through 2029. Considering all these factors, I believe Fortis would be an ideal buy.
Hydro One
Another utility stock that I am bullish on is Hydro One (TSX:H), an electricity transmission and distribution company with no material exposure to commodity price fluctuations. Roughly 99% of its operations are regulated, providing a stable and predictable revenue stream. Notably, the company has grown its rate base at a compound annual growth rate (CAGR) of 5% over the last seven years, boosting its financial growth. Supported by the rate base expansion and financial growth, the hydro producer has returned approximately 115% in the previous five years at an annualized rate of 17.8%.
The Lindsay-based electric utility company is expanding its rate base through its $11.8 billion capital investment plan, which could increase its rate base to $32.1 billion, representing an annualized growth rate of 6.6% through 2027. The company has also implemented several cost-cutting initiatives, which could support margin expansion in the coming years. Amid these growth initiatives and rising energy demand, I expect the uptrend in Hydro One’s financials to continue, supporting its dividend growth.
Canadian Utilities
My final pick would be Canadian Utilities (TSX:CU), which has raised its dividends uninterruptedly for the last 53 years. The company operates seven electric and natural gas utility assets and is also involved in power production and storage businesses. It sells most of the power generated from its facilities through long-term power purchase agreements (PPAs), thereby stabilizing its financials. Given its low-risk business and stable financial performance from its power generation facilities, the company has consistently increased its dividend payments. With a quarterly dividend of $0.4577/share, its forward dividend yield stands at a healthy 4.9%.
Moreover, the Calgary-based utility company has planned to invest $5.8 billion over the next three years to expand its rate base at an annualized rate of 5.4%. Additionally, the company plans to invest approximately $2.5 billion over the next nine years to increase its power-producing capacity by 1.5 gigawatts. Considering its healthy growth prospects and reliable cash flows, I anticipate CU will continue to raise its dividends in the coming years.
