**Daniel Kent is long FTS.TO
Canadian utility stocks are often a staple in Canadian investors portfolios, for a number of reasons.
So why do Canadians buy these stocks?
For one, they provide stability. Canadian utility stocks operate in a highly regulated environment, one that provides consistent revenues that lead to less surprises. In the end, this lowers the overall volatility of Canadian utility stocks.
Secondly, utility stocks often provide excellent dividends. Most of these companies are established and have solid roots implanted in the industry. As such, they are able to reward shareholders in the form of dividends, at least more so than a high potential growth stock.
If you’re looking for some stocks to build out the foundation of your portfolio, you’d be wise to take a look at these top Canadian utility stocks. Lets get to it! Keep in mind, these stocks are in no particular order.
Fortis – FTS.TO
A Canadian utility stock list wouldn’t be the same without Fortis. The company is one of the top 15 utility companies in North America, and continues to serve its customers with reliable, clean and safe energy. The company operates in 3 regions, Canada, the United States and the Caribbean.
They operate in the highly regulated Canadian utility sector. Fortis is a staple in most Canadian dividend investor portfolios, and for good reason. It has raised dividends for over 4 consecutive decades, and now sits at a very respectable 3.78% dividend yield.
The utility company posted a very respectable fiscal 2018, and continues to provide investors with solid returns. Fortis had revenue of $1.1 billion in 2018, a jump of 14% compared to fiscal 2017. The company also posted EPS of $0.61 for 2018, which was almost double that of 2017’s $0.32 per share. The company is expected to have a 5 year compound growth rate of around 6.3%, which is extremely lucrative considering the dividends you’re receiving and the overall safety of the investment you’re getting with Fortis.
Overall, I believe this is hands down the best Canadian utility stock to own in the country today, and may be for the foreseeable future. Fortis is fairly expensive in terms of growth, priced at a near 5 price to earnings growth ratio, but the company posts a respectable 2.4 price to sales and 1.36 price to book ratio, making it fairly cheap for a utility stock with its history of dividend increases.
Algonquin Power – AQN.TO
Algonquin Power is a power generator and distributor. The company provides natural gas, water and electricity generation, transmission and distribution services. Algonquin is one of the fastest growing Canadian utility stocks, managing to consistently raise earnings by double digits and increasing its dividend.
The company is planning some impressive growth ahead. Algonquin plans to rapidly expand its renewable and pipeline projects, but analysts aren’t quite convinced it will work yet. The company has some fairly mediocre growth rates, as analysts have a 1 year target price that is over 30% lower than it currently sits at. However, the 5 year growth estimates for this company come in at a respectable 8.20%, which was definitely enough to catch my eye.
The company pays a very healthy 4.49% yield, and the price of the utility stock right now is considered fairly reasonable. With a 2 year PEG of 1.01, Algonquin is trading on par with its current growth estimates. With a price to book of 2.45 and a price to sales of 4.35, the stock would be a no brainer if it was a little cheaper, but with its impressive growth and increasing dividend, I would be fairly happy getting in at this price.
Hydro One – H.TO
Hydro One is an electric utility company that primarily operates in Ontario Canada. The company serves over 1.3 million residential and business customers across the province. The stock is backed heavily by the provincial Government and Hydro One’s generation methods are as such that it is extremely hard for others to replicate, making barriers to entry extremely high.
The company posted a solid fiscal 2018, and is definitely a utility stock you need to be looking at. Revenue of $6.218 billion was 3.8% higher than last year and diluted EPS increased 16.3%. The company attributes most of this to favorable weather conditions. The company raised its dividend in 2018 from $0.22 to $0.23 per share.
The company pays a very respectable 4.51%, and unlike most other utility companies who are paying out over 100%, Hydro One’s payout ratio comes in at a mere 69.77%, which I would consider fairly low for a Canadian utility stock.
Analysts have a one year price target that generally reflects the utility stocks current price, and they have pegged Hydro Ones 5 year annual growth estimates at around 7.20%. Considering its high dividend yield, these are promising numbers. The company has a 2 year PEG of 3.40, so a lot of growth is already priced into this stock, but my opinion on Hydro One is still a solid buy.
Polaris Infrastructure – PIF.TO
This is my wild card in terms of Canadian utility stocks. Polaris, often confused with the recreational vehicle producer, is a renewable energy company that is generally new to the scene. The company operates in Latin America, and has placed a heavy reliance on key acquisitions in the area to drive cash flows.
As such, with it operating in Latin America, it is exposed to a rocky jurisdiction. But, I believe the rewards are well worth the risk in the developing utility company’s case. The company has a one year target price of $19.89, which indicates near 80% upside potential.
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In terms of earnings, 2018 has been somewhat of a rocky period for Polaris. In terms of sales and earnings in Q3 2018, the company missed both top and bottom lines. However, this is a small dent into a very productive 2018. Revenue hit a new record high, as well as power generation. The company is increasing cash flows, and in my opinion is priced at a point that provides investors with a huge amount of upside potential.
With a 2 year PEG of only 0.41, a price to book of 0.95 and a price to sales of 2.70, its no wonder analysts are predicting the upside potential they are. The stock is, simply put, dirt cheap. Analysts predict the company will post 34.60% revenue growth in 2019 and 11.60% in sales growth. Along with that, a 77.90% 5 year expected annual growth rate is something that has caught a lot of investors attention.
The company pays the biggest dividend of all the Canadian utility stocks on this list at 6.96%, however I am more weary of its 101.90% payout ratio. It’s hard to ignore Polaris though, especially considering its current yield is very rich, and combine that with its prospective growth numbers over the next 5 years, I think you have a slam dunk buy if you’re looking to purchase a Canadian utility stock for growth.
Overall, Canadian utility stocks are a great industry to build a portfolio with
The Canadian utility industry may struggle in the face of rising interest rates, but we’ve already got an indication from the Bank of Canada that rates could be going down. This can only mean good things for these utility companies.
I believe every portfolio should have a couple of these stocks at what I call the “foundation” portion of your portfolio. Those stocks you simply set and forget. Keep in mind this may not be the case with Polaris, as you will have to keep a keen eye on them as they move through their developmental stages and grow, but I’ve owned Fortis for over 8 years now, and there is nothing better than having a stock sit in your portfolio and pay you with very little effort in terms of monitoring and maintenance on my end.
Comment below and let me know what your favorite utility stocks are. I’d love to hear about them, and I will definitely consider adding them to this list!