The Bank of Canada seems squarely in the mode of lowering interest rates, which could be good news for utilities stocks.
Utility companies are capital-intensive, relying heavily on borrowing to finance growth, infrastructure upgrades, and maintenance. As borrowing costs decrease, utilities benefit from lower expenses, making them more attractive investments during periods of monetary easing. In addition, their dividends are often seen as competing with bonds for investor dollars, and they could appear attractive amid falling rates.
As investors grapple with market volatility, now might be an opportune time to focus on stable but often overlooked utility stocks. The S&P/TSX Capped Utilities Index has risen more than 4% this year as of Aug. 8, reflecting the sector’s resilience.
These two dividend-paying utility names are trading near or just below their fair values. A meaningful market pullback could create an attractive entry point for long-term investors.
Northland Power NPI
Fortis FTS
Northland Power NPI
Analyst: Brett Castelli
Northland Power is a global power producer that develops and operates maintainable infrastructure assets across a range of clean and green technologies, such as wind (offshore and onshore) and solar, and it delivers energy through a regulated utility.
CEO Mike Crawley expanded the firm’s global presence by focusing on offshore wind, successfully becoming a leader in the industry. Today, Northland’s footprint spans North America, Europe, Latin America, and Asia.
“We view Northland’s success in being a first mover in offshore wind as indicative of its strong development capabilities, particularly in light of its scale limitations relative to peers,” Castelli writes.
The company’s current portfolio is primarily focused on three operating projects in the North Sea. However, its development pipeline holds prospects for greater diversification achieved by growth in Asia, Poland, and additional North Sea projects.
Offshore wind is expected to remain central to Northland’s operations and strategy. However, long development timelines have caused irregular cash flow generation. “This dynamic led the company to pursue short-cycle investment opportunities in onshore renewables that have a much shorter development timeline,” Castelli says.
Furthermore, the company has used acquisitions, such as a Colombian electric utility in 2020, to bulk up its onshore renewables presence. “The acquisition adds perpetual cash flows to complement its relatively shorter-term remaining contracts on its offshore wind portfolio,” says Castelli, who puts the stock’s fair value at C$29, and forecasts the growth over the next five years, primarily driven by offshore wind and supported by onshore renewables.
Fortis FTS
Analyst: Andrew Bischof, CFA
Fortis manages regulated electric and gas utilities and independent transmission assets across North America. The company serves 3.4 million customers from eight utility transmission and distribution subsidiaries. It also has smaller stakes in electricity generation and several Caribbean utilities.
Its subsidiary ITC Holdings, which operates electric transmission in seven US states, remains the company’s prized asset. ITC gives Fortis “an opportunity to benefit from a long runway of US transmission investment opportunities from aging infrastructure to supporting renewable energy growth,” Bischof writes.
With the approval of US$10.3 billion in new long-range transmission projects by the Midcontinent Independent System Operator board of directors, ITC is well-positioned to secure additional funding for its transmission investments.
“ITC estimates its total investment opportunity could be up to US$1.8 billion,” says Bischof, stressing that “the second set of projects could be two to three times as large as the first set.”
Fortis’ regulated Canadian operations are in British Columbia, Alberta, and Newfoundland. These low-risk operations provide stable earnings, supporting steady dividend growth. However, “returns are lower in Canada because of a lower cost of capital from a lower equity component compared with its U.S. counterparts,” notes Bischof.