Canadian utilities are terrific buying opportunities when valuations are low and dividend yields are high. The summertime rally has spoiled the outlook.
Since the start of July, Fortis Inc. FTS-T has soared about 9 per cent, sending the share price to a record high this month.
The stock has easily outperformed the blue chip S&P 500 and the gold-fuelled S&P/TSX Composite Index, which have risen less than 4 per cent each over the same period.
Other large Canadian utilities, often prized by investors looking for dividend income and stability during economic downturns, are on a similar upward trajectory.
Emera Inc. EMA-T gained 8.6 per cent from the start of July through a recent peak on Aug. 8. Hydro One Ltd. H-T has rebounded nearly 6 per cent since mid-July, approaching new highs as the stock shakes off a bout of weakness that began in May.
To be sure, these single-digit gains might appear pretty ho-hum given that global stocks – and big tech names in particular – have also been ripping higher since a tariff-related selloff ended in April. The Nasdaq Composite Index has gained over 40 per cent since then and Nvidia Corp. is up over 90 per cent.
But if utilities are largely the domain of investors who prefer steady over spectacular, the sector’s recent gains might give pause to anyone contemplating, say, Hydro One’s slim 2.6 per cent dividend yield.
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Some analysts are sounding cautious on some of the stocks they cover, even after several utilities reported strong quarterly results earlier this month that easily exceeded expectations.
Theo Genzebu, an analyst at Raymond James, acknowledged in a note last week that Hydro One is a high-quality utility that generated a better-than-expected second quarter profit of 54 cents per share, or 2 cents more than analysts had forecasted.
It is also benefiting from an upbeat regulatory backdrop that includes higher distribution rates, and has been expanding with additional transmission lines.
But with the stock trading at a lofty 23-times his estimated earnings for 2026 – a premium price-to-earnings ratio compared with its peers – Mr. Genzebu believes that Hydro One’s “positive attributes are reflected in the company’s share price.”
In other words, investors should temper their expectations for additional gains this year.
Similarly, Mark Jarvi, an analyst at CIBC Capital Markets, downgraded his recommendation on Emera from “outperformer” to “neutral” last week, even though the utility reported quarterly earnings of 79 cents per share.
That was well above the 64 cents per share that analysts had been expecting, on average.
“We are not negative on the name,” Mr. Jarvi said in a note. However, he suspects the stock’s strong gains and rising valuation this year stand as a hurdle to further gains.
Monday’s analyst upgrades and downgrades
A compelling case for utilities has underpinned the sector for many years: A rising population and an increasing need for electricity to keep electric vehicles and heat pumps running should drive growth over the long term.
And as companies embrace the potential for artificial intelligence, power-hungry data centres add another reason to stay invested in the companies that provide that power.
Until about a year ago, though, investors could scoop up many utilities at beaten-up share prices and relatively low valuations.
That was largely because high interest rates drove up yields on bonds and guaranteed investment certificates (GICs), which offered meaningful competition to dividend-generating stocks.
Those days are over. In June, 2024, before the Bank of Canada began to slash its key overnight rate from a multiyear high of 5 per cent, Fortis traded below $53. Earlier this month, the stock broke the $70-barrier, for a gain of 32 per cent.
Over this time, the stock’s dividend yield has retreated from 4.5 per cent to about 3.5 per cent today, as the share price increased far faster than the payout.
That’s still an attractive yield, and Fortis – like other utilities – tends to raise the quarterly distribution regularly.
But the yield is also a sign that utilities are no longer cheap as more investors embrace a winning combination of growth, income and stability.
The argument in favour of investing in utilities for the long term is as sound as ever as electrification gains pace. What has changed? Today, most investors agree with the bullish case – making utilities an expensive bet.