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Forget Air Canada: Buy This Magnificent Utilities Stock Instead

The sun sets behind a power source
Source: Getty Images

Written by Daniel Da Costa at The Motley Fool Canada

Over the last few years, especially after the pandemic ended and there was so much pent-up demand for travel, airline stocks like Air Canada (TSX:AC) have seen a massive spike in consumer demand.

Plus, when you consider that Air Canada stock is also still trading more than 60% off its pre-pandemic high, it’s not surprising that it’s a stock on many Canadians’ radars.

There is certainly the potential for Air Canada stock to recover in the coming years and pay down the massive amount of debt it took on during the pandemic, especially with the consistently growing demand for travel and tourism.

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That said, though, in the near term, the stock is facing several significant headwinds. Not to mention, the economy continues to show how unpredictable and uncertain it can be.

So, with that in mind, if you’re looking to put some cash to work today, here’s why I’d forget Air Canada stock for now and consider a magnificent utility stock like Fortis (TSX:FTS) instead.

Air Canada stock is facing several headwinds in the current environment

Although Air Canada’s stock operations have fully recovered, and its last four quarters have been records in terms of quarterly revenue, the share price has hardly budged and continues to trade well off its pre-pandemic highs.

This is in large part due to the continued headwinds Air Canada is facing, as well as the uncertain market environment, making recovery stocks like Air Canada seem riskier than normal.

In terms of headwinds that the stock faces, one of the first is elevated debt levels, particularly when interest rates are much higher than they’ve been over the last 15 years and higher than expected inflation — what’s keeping interest rates high — continues to surprise policymakers.

Furthermore, while Air Canada has been reporting record revenue and consumer demand only continues to grow, the entire airline sector is facing capacity shortages, especially with the recent issues that airline manufacturers have been facing.

In addition, Air Canada has still been feeling the effects of inflation, especially with regard to employee costs, hurting its margins and profitability in recent quarters.

So, although it should continue to grow sales, and over the coming quarters, it should start to see an improvement in its margins as well as continue to pay down debt, for the time being, there are just too many headwinds and too few catalysts for Air Canada’s stock to see a meaningful recovery.

Fortis is the perfect stock for this environment

When you consider that the economy continues to remain uncertain and we’ve yet to see a recession materialize that was widely expected more than a year ago, it makes sense to shore up your portfolio with a reliable utility stock like Fortis.

Unlike Air Canada stock, this environment is ideal for Fortis. With interest rates expected to fall in the near term, the Canadian Dividend Aristocrat and high-quality passive-income generator should see its yield fall as a result, driving up its share price.

Furthermore, Fortis is one of the most reliable businesses in Canada, thanks to the essential services it offers and the fact that the industry is regulated by governments.

So, even if we do see a recession in the near term, not only will your capital be protected with Fortis, but you can continue earning a return thanks to its constantly growing dividend, which currently offers a yield of 4.6%.

For more than 50 consecutive years now, Fortis has increased its dividend annually, showing it can weather the storm in any and all economic environments.

Plus, it’s not often that Fortis, one of the most reliable and least volatile stocks on the TSX, trades at the bottom of its 52-week range.

Therefore, while it’s trading undervalued and while so much uncertainty remains in the economy, there’s no question that Fortis is the ideal stock to buy now, especially over Air Canada.

The post Forget Air Canada: Buy This Magnificent Utilities Stock Instead appeared first on The Motley Fool Canada.

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

2024