All in all, I would say that the past few months have been a prime time to buy income-generating stocks like the utilities, telecoms, and grocers. Their stable business models and growing income streams are extremely attractive over long periods of time for dividend-seeking investors. Not all investments are equal, though, so investors need to be cautious when selecting stocks for their dividend portfolios.
Hydro One (TSX:H) would not be at the top of the list when it comes to choosing stocks for your dividend portfolio. From the moment it was first listed as a public company, the fact that the Ontario government held such a large portion of its shares was disconcerting. Its Ontario-focused asset base also seemed to indicate a lack of scale that other companies could better provide.
Unfortunately, the company’s relationship with the government has proven to be a bit of an issue. When Doug Ford’s Conservatives forced out the board, potential investors had a real example of what can happen when you are partners with the government.
That decision has had ramifications on its ability to solve the second issue: its lack of scale. Hydro One made a good move by trying to expand its business into the United States with its attempted acquisition of Avista. Unfortunately, the deal was sacked by the Washington regulators due to the fear that the Ontario government might meddle in the company’s operations.
Really, it’s too bad that there is this dark cloud over the company. In a lot of ways, it is very tempting. I mean, the company pays a decent dividend of 4.5% at the current market price. While there isn’t a huge amount of information on dividend growth, Hydro increased the dividend by 5% earlier this year.
In addition to the dividend, Hydro One is not terribly expensive. The stock currently trades at a price-to-earnings multiple of 18 times trailing earnings and price to book of 1.2, making this at least as cheap as many of the other utility companies listed on the Toronto Stock Exchange. Its earnings are stable and growing, and the Ontario region has a stable and growing population base.
Whether the negative attitude towards the company continues remains to be seen, but the fact is that the Ontario government has put uncertainty into the minds of investors as to whether they will continue to meddle in the affairs of a private company. The market hates uncertainty.
It certainly makes it difficult to decide to buy Hydro One when there are so many Canadian alternatives. A much more established company like Fortis trades at a similar valuation and has a long history of dividend growth with a slightly lower yield. Or even consider a company like Emera with a much higher dividend and many U.S. assets.
All in all, there is not really a strong case for owning Hydro One over one of the other utilities. It has a decent business, a good dividend, and stable cash flows, which is nice. But it does not, at the moment, stand out. The government ownership has already proven it can be an issue, so for the moment it might be better to pass on this company.
