Artificial intelligence has become one of the hottest investment themes in the market, but that popularity has also created crowded trades. Memory chip makers and photonics companies have attracted enormous investor attention, pushing valuations higher.
One way to think differently is to step back and ask a simpler question. What does every data centre need regardless of which chip ultimately wins? In that context, electricity has become one of the biggest bottlenecks in AI deployment.
Data centres consume staggering amounts of power, and bringing new capacity online is far from instantaneous. That means the utility companies generating and distributing electricity may quietly benefit alongside the AI boom.
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The classic “widows and orphans” sector
Utilities have long been known as “widows and orphans” stocks because they have traditionally appealed to investors seeking stability rather than excitement. The business model helps explain why.
Demand for electricity, natural gas, and other utility services tends to be relatively inelastic. Households and businesses continue paying their utility bills regardless of whether the economy is booming or slowing.
Most utilities also operate under regulated frameworks that allow them to earn approved returns on invested capital. While that limits explosive upside, it also provides a degree of earnings stability that many other industries cannot match.
That stability often translates into lower share-price volatility, reflected by relatively low beta values, and supports steadily growing dividends over long periods.
Utilities rarely become the market’s best-performing sector in any given year, but they have historically rewarded patient investors with dependable cash flow and relatively predictable businesses.
The tradeoffs investors should know
Utilities are not perfect. Building transmission lines, substations, and generation facilities requires enormous capital investment. That means utilities often carry significant debt and remain sensitive to higher interest rates, which increase financing costs.
Long-term growth can also depend on population growth and increased electricity demand as new homes, businesses, and industrial facilities connect to the grid, and immigration policies can work for or against this.
Utilities also face operational risks. Severe weather, earthquakes, wildfires, hurricanes, and other natural disasters can damage infrastructure, leading to costly repairs and service disruptions.
My Canadian utility stock of choice
For investors looking to gain exposure to the sector, Fortis (TSX: FTS) remains one of my preferred options. Fortis operates regulated electric and natural gas utilities across Canada, the United States, and the Caribbean.
Yahoo Finance currently reports a five-year monthly beta of approximately 0.43 (less than half that of the Canadian market), reflecting the stock’s relatively low historical volatility, along with a trailing annual dividend yield of 3.1%.
Even so, valuation still matters. A great utility purchased at an excessive price can still produce disappointing returns. Investors should view utilities as long-term compounders rather than stocks that are immune from market risk.
