Hydro One workers inside the massive transmission station near Leamington on Nov. 28, 2019.Glenn Lowson/The Globe and Mail
Rising interest rates and rocky markets are disasters for growth stocks, but they are a blessing for Hydro One H-T. Ontario’s electricity distributor is thriving amid all the uncertainty – a reminder that sometimes, with the right conditions, being boring is beautiful.
To be clear, it hasn’t always been smooth sailing for the transmission utility. Crucially, Hydro One has endured constant upheaval in its executive ranks – last week the company named its third chief executive officer in five years – and prepandemic, its shares suffered following heavy government interference in its business affairs.
But lately investors can’t get enough of Hydro One. At a time when rival utilities are struggling, partly because rising rates make many dividend-paying companies look less attractive, Hydro One has found a way to keep shareholders enamoured. Its shares are back near the record high they set in early December, around $38 apiece.
Hydro One is what analysts call an “all-weather” stock, and it has the perfect ingredients for these chaotic times: Ontario’s electricity regulator permits rate hikes to counter cost inflation; the company has a sound balance sheet with very little variable rate debt; and the utility is now solely focused on its home province, so it does not have risky expansion plans that might put investors on edge. It’s steady as she goes, and shareholders are eating it up.
“They’re ticking the checkmarks that you want checked from a regulated utility,” Darryl McCoubrey, an analyst at Veritas Investment Research, said in an interview. “It’s income first.”
It may seem as though Hydro One has it easy. Customers always need electricity, so there’s natural demand. But the recent performance of rival utilities shows that delivering stability isn’t so simple.
Algonquin Power and Utilities Corp.’s shares, for one, are in free-fall because the company already has a bunch of variable rate debt, and its proposed acquisition of Kentucky Power Co. will add even more to its books. Last week, the company slashed its dividend by 40 per cent and the stock is down 49 per cent over the past year.
TC Energy Corp., while not a direct comparable to Hydro One because it doesn’t deal in electricity, is another highly regulated utility that has struggled. The cost of its Coastal GasLink pipeline, which will take natural gas in northeast British Columbia to an export terminal on the West Coast, has soared 70 per cent to $11.2-billion. The shares are down 9 per cent over the last year, despite surging energy prices.
Hydro One, meanwhile, has been delivering exactly what it said it would, even with volatile leadership. “The company continues to execute on its straightforward strategy,” CIBC World Markets analyst Mark Jarvi wrote in a note to clients last week. Earnings continue to meet or exceed earnings expectations, and the company’s balance sheet is in great financial shape.
It also helps that Ontario Premier Doug Ford has stopped meddling in Hydro One’s affairs. One of the first things he did after being elected in 2018 was push out Hydro One’s chief executive, because he thought the CEO was overpaid.
The interference cost Hydro One an acquisition. The utility bid $4.4-billion for Avista Corp., which is based in Washington State, as part of an expansion strategy to turn Hydro One into a North American player, but the state regulator ultimately rejected the deal, citing a lack of independence as a main reason for its decision.
Hydro One’s share price suffered at first, but Mr. Ford eventually stopped talking about the company, and its stock has roughly doubled since.
By contrast, rival utility Emera Inc. recently suffered from interference by Nova Scotia Premier Tim Houston, who put a cap on electricity prices for two years. The cap only affects a small portion of Emera’s overall revenue, but investors were spooked and the company’s shares are down 10 per cent over the past year.
What Hydro One shareholders must consider now, however, is whether the recent obsession with the company’s stock will persist into the next business cycle. Investors’ preferences tend to be fleeting, so while they may love Hydro One for being simple and focusing on a single province, in a year or two they may wonder what will drive long-term growth.