Trade Tensions Are Back. Here's the Canadian Stock I'd Buy.

Trade Tensions Are Back: Here’s the Canadian Stock I’d Buy

Here is a Canadian stock that looks like a smart and defensive pick amidst the return of trade tensions with the United States of America.

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published August 19, 9:00 pm EDT

The foreign policy landscape across the border in the United States keeps taking unexpected turns, and it might continue to do so under the current administration. The latest development has been trade talks between the U.S. and Canada taking a turn for the worse. Tariff threats from the U.S. president keep making headlines, and investors in companies with cross-border operations are rightfully nervous.

Diversifying into stocks that also do business in the U.S. can be great for Canadians. However, uncertainty around trade agreements is forcing Canadian investors to focus more on Canadian companies with no business in the U.S.

The TSX has several blue-chip stocks that inspire confidence in Canadian investors, and I think Hydro One (TSX:H) is one such asset to consider to this end.

shopper checks her receipt — Source: Getty Images

Hydro One stock

Hydro One is a company that might be well-known to Canadians in Ontario. The $33.27 billion market cap company essentially owns and operates 99% of the high-voltage transmission network in the province, and it has a large share of Ontario’s local power distribution under its belt.

Its monopoly in Ontario might seem like the company is limiting its scope. After all, expanding to other markets means that it can generate more revenue, right? The thing about its focus on Ontario is that it protects the company from the impact of any tariff war. When tariffs rise, they can affect businesses across several industries. Hydro One provides transmission services primarily to Ontario residents and businesses.

Hydro One has already demonstrated the defensiveness of its business model through one trade war. Another one will only cement the fact that it can perform well in such environments.

Almost the entire revenue generated by Hydro One comes from rates set by the Ontario Energy Board. The rate-regulated environment set by the province’s utility regulator means Hydro One generates predictable revenue and cash flow. Clear visibility of its earnings potential allows the company’s management to invest in expanding its rate base confidently.

Hydro One has been investing a lot to improve its rate base. It has 15 transmission lines that are under construction or in the development pipeline. These developments set the company up for strong and visible growth in the coming quarters and years.

Foolish takeaway

The immense growth potential of the stock makes it attractive enough, but its dividends make it a no-brainer investment for many Canadians. The stock recently declared a $0.35 per share dividend that it distributes each quarter. The management plans to pay out up to 80% of net income over time.

In 2024, the annual payout per share from Hydro One stock was $0.84, and as of the latest update, it will pay $1.41 per share to investors each year. Analysts anticipate its dividend will grow to $1.70 per share each year by 2030. Investing in a utility stock that boasts a growth profile atypical of the industry can be one of the smartest decisions to make in an uncertain market environment.