Hydro One is not the defensive utility stock you are looking for, this PM says

Investors looking for safe havens in the market may be thinking about defensive utility stock Hydro One (Hydro One Stock Quote,Chart, News TSX:H), which has a stable dividend and a clean balance sheet.

But for your money, there are better plays out there, says Jamie Murray, portfolio manager and head of research at Murray Wealth Group, who argues that Hydro One’s stock has already made its move this year.

“Hydro One’s shares have actually done pretty well since they abandoned their bid to buy the Washington utility, Avista, which was blocked by regulators. Shares have rallied pretty nicely and that’s been in sympathy with interest rates declining as well as a general thirst for safer companies with less risk. We’ve seen a lot of the staples and utilities rally,” said Murray, in conversation with BNN Bloomberg on Tuesday.

“With a 3.9-per-cent yield, there’s not much growth in this company. I think that you could do better finding some other names,” he says.

Electricity transmission and distribution utility Hydro One, which IPO’d in 2015, announced earlier this year that a proposed merger with Avista Corp was being cancelled after the Washington Utilities and Transportation Commission rejected the deal, saying that Hydro One’s part-ownership by the Ontario government would potentially make Avista subject to political winds in the province.

As a result of the deal being quashed, Hydro One was forced to pay Avista US$103 million in termination fees.

“If you’re just looking for income, I think that there are better ways to get it, especially in this environment where Hydro One’s shares are up about 20 per cent this year…”

Hydro One’s share price was on a two-year slide when it started to turn things around over the second half of 2018. Since the start of January, Hydro One’s share price has gained 22 per cent, reaching a three-year high of $25.06 on Tuesday.

But Murray says that the uptrend won’t last forever for Hydro One.

“We own Capital Power in our income fund, which yields about five and a half to six per cent. There is a little more risk with it but we still don’t see the yield being cut,” Murray says. “You could even just buy a basket of companies — you could add Innergex, which is a renewable company, and even with some of the real estate income trusts you get a five and a half to six per cent yield.”

“If you’re just looking for income, I think that there are better ways to get it, especially in this environment where Hydro One’s shares are up about 20 per cent this year,” he says.

Hydro One last reported its earnings on August 9, where it missed estimates for both top and bottom lines.

The company’s second quarter featured revenue of $1.41 billion, down from $1.48 billion a year earlier, with a profit of $155 million, a 23-per-cent decline. Adjusted net income was $0.26 per share compared to $0.32 per share a year earlier.

Analysts had been expecting $1.44 billion in revenue and $0.27 per share in adjusted income. Management said that the quarterly dividend would stay at 24.15 cents per share.

Hydro One’s next earnings report is due on November 7.

File under: Defensive utility stock