Ontario Premier Doug Ford plays politics with Hydro One

As we move through a year with political and economic volatility, utilities in our backyard have a lot of appeal.

While not recession proof, the businesses are recession resistant. Many are regulated monopolies which means captive customers offering predictable streams of revenue and profit. They grow slowly but offer dividends that tend to grow.

 Last year was a good one for Canadian utilities as interest rates eased. The TSX Utilities Capped Index (TSX:TUTT) ended the year with an 8.5% gain, matching its increase in 2023. An index anchor is Hydro One (TSX:H) which transmits 98% of Ontario’s electricity needs. Its dividend yield is not the highest in the group – that goes to Fortis Inc. (TSX: FTS) with a 4.1% yield, but Hydro One has delivered in other ways. The stock hit new highs in 2024 and ended the year with an 11.5% gain. The dividend was increased in November, for the ninth consecutive year. Its 5-year total return is 77%, highest in the group.

Hydro One is a candidate for any conservative portfolio but this year may prove challenging depending on which way the tariff wars go. Ontario premier Doug Ford says he will consider  curtailing electricity exports to the US should the incoming Trump administration slap high tariffs on Ontario car parts. It could just be bluster, but a tit-for-tat would hurt all Hydro One shareholders, of which the province is the largest.

Here’s an update:

Background: Hydro One was created from the old Ontario Hydro in 2015. It has two main businesses: the transmission of electricity and the distribution of electricity to utilities throughout the province. Overall, it transmits 98% of Ontario’s electricity and serves 1.5 million customers. The province owns 47% of the common shares.

Performance:  The shares hit a high of $48.05 in mid-September. They have sold off since and are about  8% at the current price of $44.27.jan 2

In its third quarter reported Nov. 8, Hydro One showed strong revenue growth amid rising costs. Earnings rose 3% to $0.62 per share. This was due to rate increases approved by the Ontario Energy Board and higher peak demand for electricity. Revenue of $2.2 billion was 13% higher than a year ago.

Discussion & Outlook:  Morningstar analyst Andrew Bischof expects Hydro One to take advantage of investment opportunities that will allow it to achieve the high end of its forecast of 5% to 7% annual earnings growth. He expects the dividend to grow in line with earnings, maintaining the company’s 70% to 80% dividend payout ratio. He notes that Hydro One has among the strongest balance sheets in the sector, meaning it can fund its investments internally without borrowing.

Mr. Bischof warns that even though the province is a minority shareholder, it holds an outsize influence on the future of the company. While the internal political atmosphere has stabilized for Hydro One, the external one is volatile as witnessed by Premier Ford’s comments. He did say such a move would be a last resort and it is not clear how it would work if the worst came to pass.  Hydro One is part of an interconnected electricity grid that includes Hydro-Québec and BC Hydro in Canada as well as US utilities in neighbouring states. The electricity trade between the two countries is integrated for stability and balancing supply and demand. Any disruption has implications for both.

 RBC Capital markets analyst Maurice Choy believes Hydro One is well-positioned “as a stock of choice for investors seeking defensive exposure” in the utilities sector. He says it is a good option amidst volatility and ongoing recession rhetoric.

Mr. Choy likes the simplicity of its business which includes a good environmental, social and governance (ESG) score because its assets are towers and wires not power generation.

Both analysts see the stock as fully valued at its current price.

Dividend: The $1.19annual dividend yields 2.8% at current prices. Mr. Choy sees it growing by 5.5% this year and another 5% in 2025.

Conclusion: Hydro One is a core holding for conservative investors offering slow, steady growth and a rising dividend. It is insulated from commodity prices changes since it transmits electricity but does not generate it. It has traditionally been insulated from global political and economic disorder, but this year is different. Until the Trump tariff plan is clarified it may be a pawn in a larger game. That clarity should come in the next few weeks.

The uncertainty doesn’t change Hydro One’s positive fundamentals, but does create short term confusion, which may drive the price lower. 

This article appeared in a recent issue of  The Income Investor.  For information on how to reprint this article please view this page.