The Canadian equity market has gained momentum this month, with the S&P/TSX Composite Index rising 1.2%. However, ongoing geopolitical tensions in the Middle East, persistent inflationary pressures, and trade uncertainties continue to cloud the economic outlook. Against this backdrop, market volatility could persist in the coming months. Investors may therefore benefit from adding defensive stocks to their portfolios, particularly companies that provide essential services, generate predictable cash flows, and are less sensitive to economic fluctuations.
Utilities are particularly attractive in uncertain times, as they provide essential services such as electricity, natural gas, water, and telecommunications. Their steady demand and regulated business models can support predictable earnings and cash flows across economic cycles. Against this backdrop, let’s compare Fortis (TSX: FTS) and Hydro One (TSX: H) to determine which utility stock offers a more compelling buying opportunity right now.
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Fortis
Fortis operates nine utility businesses and serves 3.5 million customers across Canada, the United States, and the Caribbean. Its largely regulated asset base, focused primarily on low-risk electricity and natural gas transmission and distribution, supports predictable earnings and dependable cash flows across economic cycles. This resilience has helped the company deliver a total return of about 168% over the past decade, or an annualized return of 10.4%. Fortis also has an impressive 52-year record of consecutive dividend increases and currently offers a forward dividend yield of 3.4%.
Looking ahead, the electrification of transportation, the expansion of AI-ready data centres, and economic and population growth could boost demand for Fortis’s services. To capitalize on these opportunities, the company is executing its $28.8 billion capital investment plan, targeting annualized rate base growth of 7% to reach $57.9 billion by the end of this decade. These investments, along with operational efficiencies, disciplined capital allocation, innovation, and favourable customer rate revisions, could support sustained revenue and earnings growth. Reflecting this confidence, management expects to increase dividends by 4% to 6% annually in the coming years.
Despite its defensive business model and growth prospects, Fortis’s valuation is also worth considering. The stock currently trades at 2.8 times analysts’ sales estimates and 20.3 times projected earnings for the next 12 months. Overall, its reliable cash flows, consistent dividend growth, and expanding rate base make Fortis a compelling long-term option.
Now, let’s examine Hydro One and see how it compares.
Hydro One
Hydro One is a pure-play electricity transmission and distribution company serving 1.5 million customers across Ontario. It has no exposure to power generation and earns approximately 99% of its revenue from regulated operations. This business model provides predictable earnings and cash flows while limiting its exposure to macroeconomic fluctuations and commodity-price volatility.
Hydro One has grown its rate base at an annualized rate of 5% since 2018, supporting its financial performance and shareholder returns. Over the past decade, the utility has delivered an impressive total shareholder return of approximately 191%, equivalent to an annualized return of 11.3%. Since 2017, it has also increased its dividend at an annualized rate of 5.4% and currently offers a forward dividend yield of approximately 2.8%.
Looking ahead, rising electricity demand and Ontario’s population growth could create further investment opportunities for Hydro One. The company has 15 transmission projects at various stages of development and construction, while the expanding housing market could drive additional investment in its distribution network. Meanwhile, Hydro One is advancing its $11.8 billion capital investment plan, which could grow its rate base to $32.5 billion by the end of 2027, at an annualized rate of approximately 6%. Supported by these investments, management expects to maintain annual dividend growth of around 6% through 2027.
From a valuation perspective, Hydro One trades at 3.2 times analysts’ sales estimates and 21.3 times projected earnings for the next 12 months. Its regulated business model, ongoing infrastructure investments, and consistent dividend growth provide a solid foundation for long-term returns.
Investors’ takeaway
Although Hydro One has outperformed Fortis over the past decade, I favour Fortis for its proven track record of consistent shareholder returns and dividend growth, clearer long-term growth opportunities, broader geographic diversification, and relatively attractive valuation.
