Although the global equity markets have bounced back this year after a challenging 2022, few economists predict a recession in the second half of this year. With inflation still at higher levels and a strong labour market, economists expect the Federal Reserve to continue its rate hikes, which could hurt global growth. So, amid the uncertainty, investors can strengthen their portfolios by investing in low-risk businesses, such as utilities.
So, given the volatile environment, which among Fortis (TSX:FTS) and Canadian Utilities (TSX:CU) would be an excellent buy right now?
Fortis
Fortis is an energy infrastructure company, with around 93% of its assets in the low-risk transmission and distribution business. It serves 3.4 million customers across Canada, the United States, and three Caribbean countries, meeting their electric and natural gas needs. Given its low-risk, regulated utility businesses, the company’s financials are less susceptible to market volatility, thus allowing the company to raise dividend consistently.
Fortis has raised its dividend for the last 49 years. It currently pays a quarterly dividend of $0.565/share, with its yield for the next 12 months at 4.1%. Meanwhile, the company has adopted a five-year capital-investment plan of $22.3 billion, which would grow its rate base at a CAGR (compounded annual growth rate) of 6.2% to $46.1 billion. Expanding the rate base could boost its financials in the coming years.
Besides, Fortis’s management expects the cash generated from its operations to meet 57% of the capital requirement, while 10% from DRIP (dividend-reinvestment plan) and the rest from debt. Additionally, the company has maintained its operating cost growth below inflation for the last five years at an annualized rate of 2%. So, given its healthier outlook, the company expects to raise its dividends at a CAGR of 4-6% through 2027.
Canadian Utilities
Canadian Utilities transmits and distributes electricity and natural gas. It is also involved in power production, energy storage, and industrial water solutions. Meanwhile, it sells around 83% of the power produced from its facilities through long-term contracts, which shields its financials from price and volume fluctuations. Supported by these stable financials, the company has raised its dividend for the last 51 years, with its forward yield at 5.1%.
Meanwhile, Canadian Utilities is expanding its renewable energy assets with the recent acquisition of wind and solar power-producing facilities from Suncor Energy. The company has planned to grow its rate base at a CAGR of 2% over the next three years. Further, the company has taken several initiatives, which have lowered its operation and maintenance costs of electricity distribution by 11% and natural gas distribution by 29% since 2015. So, I believe the company is well positioned to maintain its dividend growth.
Investor takeaway
Investors consider utility stocks to be defensive, as they are less susceptible to market volatility. However, these stocks have been under pressure over the last few months due to rising interest rates. Given their capital-intensive business, investors fear that the rising interest rates could raise their interest expenses, thus hurting their profit margins.
Despite the near-term volatility, their solid underlying businesses and predictable cash flows make them attractive to income-seeking investors. Meanwhile, I am more bullish on Fortis due to its higher growth prospects and cheaper price-to-book multiple of 1.4.
