Written by Rajiv Nanjapla at The Motley Fool Canada
Utility companies provide electricity, natural gas, water, and other necessities. Given the essential nature of their business, these companies are less susceptible to market volatility. So, these companies will safeguard your capital during challenging times while delivering modest returns. Here are three top Canadian utility stocks that you can buy right now.
Fortis (TSX:FTS) operates 10 utility assets, serving 3.4 million customers across Canada, the United States, and three Caribbean countries. With 93% of its assets involved in transmission and distribution and 99% regulated assets, the company has been posting consistent performance for years. It has delivered an average annual total shareholder returns of 10.9% for the previous 20 years, outperforming the broader equity markets. Also, the company has increased its dividends for 50 consecutive years, with its forward yield at 4.19%.
Meanwhile, the utility company is making a capital investment of $25 billion from 2024-2028, representing a $2.7 billion increase from its 2023-2027 plan. These investments could expand its rate base at an annualized rate of 6.3%. The growth in its rate base and improving operational efficiency could boost its financials in the coming years. So, the company’s management is confident of increasing its dividends at a CAGR (compound annual growth rate) of 4-6% through 2028. Its valuation also looks cheap, with its NTM (next 12-month) price-to-earnings multiple at 17.8. Considering all these factors, I am bullish on Fortis.
Canadian Utilities (TSX:CU) is an energy infrastructure company that transmits and distributes electricity and natural gas. It is also involved in the power production and storage business and offers industrial water solutions. Its regulated utility businesses have delivered an annualized total shareholder return of 9.3% for the previous 20 years, beating the S&P/TSX Composite Index.
However, the company has lost around 10% of its stock value this year as rising interest rates have weighed on the capital-intensive utility sector. Amid the correction, the company trades at an attractive NTM price-to-earnings multiple of 13.9. The company has several renewable energy projects in various development stages, which can increase its power production capacity by 1.5 gigawatts. Also, the company could benefit from the growing transition towards clean energy. Considering all these factors, I believe Canadian Utilities would be an excellent addition to your defensive portfolio.
Hydro One (TSX:H) is an electricity transmission and distribution company that serves around 1.5 million customers, predominantly in rural areas. With 99% of its business being rate regulated, its financials are less susceptible to market volatility. In the recently reported third-quarter earnings, the company’s basis EPS (earnings per share) increased by 17.6% amid increased rates, higher demand, and lower income tax expenses.
Further, the company has planned to invest around $11 billion over the next four years, expanding its transmission and distribution assets. These investments could increase its rate base at an annualized rate of 6% through 2027. Amid these planned investments, the company’s management projects its EPS to grow at an annualized rate of 5-7% through 2027. Also, the management hopes to increase its dividend at a CAGR of 6% through 2027. Given its growth prospects and a reasonable NTM price-to-earnings multiple of 20.5, I believe Hydro One would be an excellent buy.
Before you consider Canadian Utilities, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in November 2023... and Canadian Utilities wasn't on the list.
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