Canadian utility stocks continue to struggle coming into 2024, with higher interest rates and inflation causing these dividend all stars to have more costs on hand. However, the question now remains whether Canadian utility stocks, and in particular Canadian Utilities (TSX:CU) stock itself will see a recovery this year.
So today, let’s go over some potential issues for CU stock. And furthermore, we will discuss whether this makes it a great long-term value play, or one to avoid.
Growth challenges
Analysts have been bullish on utility stocks in the past, with long-term growth and contracts leading to a strong model for creating cash flow. However, they are now less bullish on utilities across North America.
Inflation continues to be persistent in the United States, said one analyst, and this will likely keep the key interest rate higher for longer. That will likely also be the case in Canada as well. This will keep bond yields up as well, which is where utilities will struggle.
Canadian utilities have been referred to as “bond proxies” in the past as they provide reliable dividends and slow, stable growth. That makes them similar to bond investments. The thing is, bond yields are incredibly high right now. So why would investors pick up utilities with riskier future growth when bond yields are at the highest levels since 2007?
Rising borrowing costs
Bond yields aren’t the only issue, however. Canadian Utilities will also likely continue to see these higher interest rates affect the borrowing costs for these companies. This is key, as utilities tend to need debt to maintain and indeed expand their operations. So there isn’t likely to be an increase in profits at large in 2024.
What’s more, with no new projects, there is also the problem of rising costs creating an even more unstable balance sheet. This could come down to even higher rate increases for consumers, which have seen electricity bills rise on average 20% since the COVID-19 pandemic, according to analysts.
This could translate into consumers falling behind on their bill payments, and leading to even more losses. So all in all, it doesn’t exactly look like a great year for utility stocks.
What about long term?
Now, this scenario is all about 2024. Beyond that, what do utilities have for investors to consider? Quite a lot actually. In fact, this seems to be a temporary scenario, and one that utility stocks have dealt with in the past. And none more so than CU stock.
CU stock is still the longest serving Dividend King on the TSX today. Higher interest rates and bond yields may prove troublesome in the next year, but long term analysts believe the stock provides a great deal. These are companies that provide refuge from ongoing geopolitical issues and economic activity. Furthermore, long term they provide exposure to the transformation to renewable energy usage.
As interest rates and bond yields drop then, CU stock will likely see a turnaround. That makes today’s share price a steal trading at 14.6 times earnings with a dividend yield at 5.7%.
