Canadian utility stocks have not been kind to investors in the first half of 2018. The S&P/TSX Composite Index reached positive territory in the last few trading days for the first time since January, and the stock market has struggled broadly following a sell-off in late January and early February.
However, there are other factors behind the decline of utility stocks. The primary culprit appears to be rising interest rates and the promise of future tightening. Utilities have been an attractive option for income investors, with bond yields hovering around historic lows since the 2007-2008 financial crisis. Domestic and global growth surged in 2017, prompted central banks to move forward on tightening after almost a decade of loose monetary policy and historically low interest rates.
The Bank of Canada surprised some analysts by pulling the trigger on an early hike in January. Since then it has been more dovish, citing high Canadian debt, housing turmoil, and ongoing uncertainty surrounding global trade. On June 8, Statistics Canada confirmed that the economy shed 7,500 jobs in the month of May, which was far below the expected 23,500 job gain and represented the second monthly decline in a row.
The breakdown of relations between Canada and the United States at the most recent G7 meeting may give policymakers pause going forward. How should investors respond?
Target this top utility stock
Investors should take a good look at Fortis Inc. (TSX:FTS)(NYSE:FTS) today. The St. John’s company owns and operates utility and transmission assets in Canada and the United States. Its presence south of the border is enticing, and Fortis saw a boost from U.S. tax reform passed in December 2017.
Shares of Fortis have dropped 11.9% in 2018 so far. The stock is down 10% year over year. Fortis released its first-quarter results on May 1.
Fortis reported adjusted net earnings of $293 million, or $0.69 per share in the first quarter compared to $287 million, or $0.71 per share in the prior year. The company experienced an interruption in its operations in Turks and Caicos due to the destruction caused by Hurricane Irma. However, its team worked quickly to restore service and the company expects to recoup most of its revenue under its business interruption insurance this year.
Capital expenditures are projected to reach $3.2 billion in 2018. Its five-year $15.1 billion capital expenditure plan is expected to increase rate base to $33 billion by 2022. This would result in a compound annual growth rate (CAGR) of 5.4%.
Fortis last announced a quarterly dividend of $0.425 per share, representing a 4.1% dividend yield. The company has delivered dividend growth for over 40 consecutive years.
Fortis is a strong option, as the Canadian central bank may turn even more dovish in the second half of 2018. Investors who are looking to add income with uncertainties piling up should consider adding Fortis to their portfolios today.
