Utilities are typically one of the more popular options for income investors. Not only is energy demand fairly stable, but rates are often regulated, meaning that the provider can get guaranteed, predictable returns on nearly every project.
Stable earnings nearly always result in reliable dividends. For example, North American utility company ATCO Ltd. has raised its payout every year since 1993. Another popular utility, Emera Inc., has raised in dividend annually for over 15 years.
While the bigger companies are often more discussed, here’s one no one seems to be talking about.
One of the biggest
With a $13 billion market cap, Hydro One Ltd. (TSX:H) is no small cap. It has one of the largest electric transmission networks in North America, serving 96% of the entire Ontario market. Still, its shares are largely ignored. In the past month an average of only $4 million worth of shares were traded per day. For comparison, competitor Emera Inc. (with a market cap of only $6.5 billion) has nearly $30 million worth of shares traded per day.
Why isn’t anyone paying attention? One of the major reasons is that the company was, until recently, government owned. In June 2015 the Ontario government unveiled a plan to privatize Hydro One, making it one of the largest privatizations of all time in Canada. On November 5, 15% of the company’s shares were sold to the public. Eventually, the plan calls for 60% of the company to be privatized.
So, even though the company is one of the biggest utilities in North America, only a small portion of shares currently trade on the market. Additionally, the company IPO’d only a few months ago, so analyst coverage is likely to increase as 2016 goes on. This could represent a limited-time opportunity to buy into what looks like a great long-term business.
Nearly 100% regulated
Hydro One’s overall business is 99% fully regulated. This provides one of the most stable and predictable cash flow streams in the entire stock market. Growth is also fairly predictable as regulations include rate-based additions and pre-approved price increases. Terms also allow the company to pass on fluctuations in the cost of electricity directly to consumers. That’s one reliable business.
Management is targeting a reasonable 70-80% dividend payout ratio with an initial expected annualized dividend of $0.84. Today that results in a yield of 3.7%. While that isn’t a market-leading figure, it is one of the safest.
There’s plenty of room for growth as well. Through 2019 the company expects its rate base to grow by 4.2% a year, while capital expenditures will fall nearly every year.
With one of the strongest investment grade balance sheets in the entire utility sector, Hydro One is a great option for anyone worried about market volatility.
