When it comes to utility stocks, Fortis (TSX:FTS) seems to be the best of the best. The newly founded Dividend King demonstrates a history of 50 years of consecutive dividend increases. But what about growth?
That’s why today we’re going to discuss a bit about why investors may want to look elsewhere. And there’s one stock I’d pick up for that.
Why not Fortis?
First, why not Fortis stock? Fortis’s stock performance has been lacklustre. The stock is trading within a 52-week range, with a current price target of $57, implying limited upside potential. The price-to-earnings (P/E) ratio of 17.6 also suggests that the stock might be overvalued compared to its peers in the utilities sector, which typically offer more attractive growth or dividend prospects.
Fortis’s projected earnings growth is modest. The company’s earnings per share (EPS) is expected to grow from $2.33 to $2.40 per share, reflecting a minimal increase of approximately 3%. This growth rate is relatively low compared to other investment opportunities available in the market, which could limit the stock’s appeal to growth-oriented investors.
While Fortis is known for its strong dividend yield of 4.34%, its dividend-payout ratio stands at 73.8%. Although this is within a sustainable range, payout ratios above 75% can be risky as they might not be sustainable in the long term. The company’s dividend-growth track record is also not extensive, which may raise concerns about future dividend stability.
Consider Hydro One instead
When evaluating investment opportunities in the utility sector, it’s essential to consider both the financial performance and growth potential of the companies involved. Hydro One (TSX:H) presents a compelling case for investment, especially when compared to Fortis.
Hydro One’s diversified business segments, including transmission, distribution, and telecommunications support services, provide resilience against market fluctuations. The company’s focus on technological innovation enhances its competitive edge in the industry. This strategic positioning supports long-term growth and stability, making it a more attractive investment compared to Fortis.
Hydro One’s stock has shown resilience and growth potential. In the last three years, Hydro One shares have increased by 8%, indicating a positive trend. In comparison, Fortis has seen limited growth potential, with a P/E ratio suggesting it might be overvalued relative to its peers in the utilities sector.
Hydro One has demonstrated robust financial performance, with its recent quarterly earnings report exceeding analyst expectations. The company reported an EPS of $0.49, slightly beating the consensus estimate of $0.48. This positive performance indicates a stable and growing financial position, which is attractive to investors looking for reliable returns.
Hydro One has a solid track record of dividend payments, recently raising its quarterly dividend by 6% to $0.3142 per share. This increase reflects the company’s commitment to returning value to its shareholders. It currently has a 65% payout ratio. In contrast, Fortis has a high payout ratio, raising concerns about the sustainability of its dividends in the long term.
Bottom line
Hydro One offers a more compelling investment opportunity than Fortis, given its strong financial performance, stable and growing dividends, positive analyst recommendations, strategic business segments, and better market performance. Investors looking for a reliable and growth-oriented utility stock should consider adding Hydro One to their portfolios.
