Yahoo Finance Why Utility Stocks Could Be Canada’s Safeguard Against Growing Rates
Written by Kay Ng at The Motley Fool Canada
Higher interest rates are a growth dampener for utilities, which normally have sizeable debt on their balance sheets to help fund their capital investments. We know that, at one point, rates will come down, which will be a booster for business growth and stocks in general.
Regardless of where rates head next, investors could get some of the most reliable long-term returns from top Canadian utility stocks. Why is that? Because these utilities often provide essential products and services that are required through the economic cycle. They may also have inflation escalations or predictable returns on their capital investments.
When utility stocks have a long streak of growing dividends, it is a good sign investors should research further. Importantly, many of these stocks offer nice current income.
Fortis stock
Fortis (TSX:FTS) stock is a fabulous blue chip stock to buy on dips. Just so happens it is experiencing a dip right now. So, investors can look more closely for a potential buy. Here’s what this utility stock offers you.
It is a leading North American regulated utility with assets diversified primarily across Canada and the United States. Specifically, it has 10 regulated utilities with 93% of assets used for transmission and distribution, providing essential services through the economic cycle. This means that Fortis’s earnings should be resilient even during recessions. Indeed, the utility stock has an incredible dividend growth history. This year marks the 50th year of its dividend growth streak!
Fortis has a $25 billion capital plan for 2023 to 2028, which management anticipates will drive rate base growth of about 6.3% per year across its regulated utilities. It is a low-risk capital plan that consists of 18% of major investment projects. So, Fortis has clear, stable growth.
At $53.64 per share, Fortis stock starts you off with a dividend yield of 4.4%. For your reference, FTS’s five-year dividend growth rate is 6%. Management also gave guidance for dividend growth of 4–6% per year through 2028. In a higher interest rate environment, the stock appears to be fairly valued trading at a price-to-earnings ratio of about 17.5. It can deliver long-term total returns of more or less 10%.
FTS, BEP.UN, and XLU 10-Year Total Return Level data by YCharts
Brookfield Renewable Partners L.P.
Brookfield Renewable Partners L.P. (TSX:BEP.UN) is well positioned for rising interest rates. It has no near-term debt maturities. Furthermore, it has 98% long-term, fixed-rate debt so that its interest expense is predictable. As well, it has a solid financial position, maintaining a BBB+ investment-grade balance sheet and having strong access to capital with available liquidity of about US$4.4 billion.
The utility is a large global renewable power and decarbonization solutions company with operations in key technologies, including hydroelectric, wind, solar, distributed energy and sustainable solutions across five continents. BEP has demonstrated a track record of growth, delivering funds from operations per unit growth of 10%-plus per year over the last decade.
Management projects this kind of growth to continue through 2028 from inflation escalations, margin enhancement, its development pipeline, and mergers and acquisition opportunities. It is “confident on delivering 5–9% distribution growth and 12–15% total returns,” as highlighted in its 2023 Investor Day presentation. This would be market-beating long-term returns. Indeed, it has outperformed over the last decade, as illustrated in the graph above.
For the record, BEP’s 10-year cash distribution growth rate is 5.7%. At $35.88 per unit at writing, it seems to be fairly valued and offers a cash distribution yield of 5%.
The post Why Utility Stocks Could Be Canada’s Safeguard Against Growing Rates appeared first on The Motley Fool Canada.
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Fool contributor Kay Ng has positions in Brookfield Renewable Partners. The Motley Fool recommends Brookfield Renewable Partners and Fortis. The Motley Fool has a disclosure policy.
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