Don’t buy Hydro One stock right now, Industrial Alliance says

A snub from Idaho state regulators highlights the political risk in Hydro One (Hydro One Stock Quote, Chart TSX:H), Industrial Alliance Securities analyst Jeremy Rosenfield.

On Wednesday, Idaho Public Utilities Commission (IPUC) issued a decision rejecting Hydro One’s proposed acquisition of Avista Corp. In July of 2017, Hydro One reached a deal to buy the U.S. utility.

Rosenfield notes the decision indicates that IPUC was primarily concerned with Hydro One’s governance issues, which it felt outweighed the benefits to AVA customers. The analyst says the same concerns are currently outweighing the benefits of Hydro One for investors.

“We continue to view Hydro One as a fundamentally defensive investment, underpinned by (1) stable earnings and cash flows from its regulated utility businesses, (2) healthy organic rate base and earnings growth (4-6%/year through 2022), and (3) an attractive dividend (~5% yield, 70-80% target payout),” he says. “However, we continue to see heightened political/regulatory risk as an overhang to longer-term valuation multiple expansion, outweighing Hydro One’s fundamentals over the medium term. We also see greater potential near-term share price volatility. We would remain on the sidelines at this point.”

In a research update to clients today, Rosenfeld maintained his “Hold” rating and one-year price target of $21.00 on Hydro One, implying a return of 8.4 per cent at the time of publication.