Utility companies provide essential services, meeting the electricity, natural gas, and water needs of their customers. Given the critical nature of their services, these companies operate under a regulated framework, thereby ensuring fair pricing. Due to the regulated framework and the essential nature of their business, the financial performance of these companies is less prone to economic cycles and market fluctuations. Therefore, these companies deliver reliable returns and consistently pay dividends.
Against this backdrop, let’s look at three utility stocks that are ideal for long-term investors.
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Fortis
Fortis (TSX:FTS) serves 3.5 million customers across the United States, Canada, and the Caribbean, meeting their electric and natural gas needs. Around 99% of its assets are regulated, while 93% are involved in low-risk transmission and distribution business. Additionally, the company’s expanding asset base and improving operating performance have contributed to its financial growth, thus driving its stock price growth and consistent dividend increases. Over the last 20 years, the utility company has delivered an average annual shareholder return of 10.1%. It has also raised its dividend for 51 consecutive years, while its forward dividend yield stands at 3.8% as of the June 16th closing price.
Moreover, Fortis is continuing with its five-year capital investment plan of $26 billion, which spans from 2025 to 2029. These investments could grow its rate base at a 6.5% compound annual growth rate (CAGR) to $53 billion by 2029. Additionally, the company anticipates generating 70% of these investments from its operations and dividend reinvestment plans. So, these investments wouldn’t substantially raise the company’s leverage. Further, the Bank of Canada has lowered its benchmark interest rates seven times since last June, while analysts are predicting two more 25-basis point rate cuts this year. Lower interest rates could benefit capital-intensive businesses, such as those in the utilities sector. Considering all these factors, I believe Fortis would be an excellent long-term buy.
Hydro One
Another utility stock that would be an excellent long-term investment is Hydro One (TSX:H), a pure-play electricity transmission and distribution company with minimal exposure to commodity price fluctuations. Additionally, approximately 99% of its business is fully rate-regulated, shielding its financials from market volatility. The company has also grown its rate base at an annualized rate of 5.1% since 2018 to $26.52 billion by 2024. Along with these expansions, its initiatives to improve efficiency and reduce expenses have supported its financial growth.
Supported by these healthy financials, the company has returned 122% over the last five years at an annualized rate of 17.3%. The company has also increased its dividends at an annualized rate of 5.2% over the past seven years, with a forward dividend yield of 2.73%.
Moreover, the electricity demand is increasing amid growing awareness of pollution, technological advancements, and government initiatives to promote electrification. Therefore, the demand for Hydro One’s services will rise in the coming years. Meanwhile, the company is continuing with its $11.8 billion capital investment plan, which could grow its rate base at an annualized rate of 6.6% to $32.14 billion by 2027. These growth initiatives could support the company’s financial growth in the coming years, thereby facilitating dividend growth. The company’s management is optimistic about increasing its dividend at an annualized rate of 6% through 2027.
Canadian Utilities
Canadian Utilities (TSX:CU) is an energy infrastructure company that is involved in the transmission and distribution of electricity and natural gas. It is also involved in electricity generation and energy storage businesses while selling the power produced from these facilities through long-term power purchase agreements (PPAs). Given its low-risk and regulated business, the company generates healthy cash flows, allowing it to raise dividends for 53 consecutive years. Its forward dividend yield stands at 4.83% as of the June 16th closing price.
CU is also expanding its asset base through its $5.8 billion capital investment plan. These investments could increase its rate base at an annualized rate of 5.4% through 2027. Additionally, the company is expanding its power-producing capacity through a $2.5 billion investment, which could increase its capacity to 1.5 gigawatts over the next nine years, up from its current 457 megawatts. Considering all these factors, I believe CU can continue its dividend growth, thereby making it an excellent buy.
