While Canadian Public Services (TSX:CU) has long been a reliable choice for conservative investors due to its consistent dividend and stable yield, but it might not be the best choice today, particularly for those looking for growth. With higher interest rates and increased competition in the utility sector, CU's growth prospects appear more limited. And its share price has struggled to keep pace with broader market gains. Investors might want to consider whether reliable dividends are enough to offset slower growth. Especially when compared to other stocks with greater capital appreciation potential.
Why not CU?
CU has long been a stable performer in the Canadian market, but there are a few red flags that potential investors should be aware of. First, the company's dividend payout ratio is over 90%, meaning that nearly all of its earnings are being paid out in the form of dividends. This leaves little room for reinvestment or to maintain dividend payments if earnings were to decline. A high payout ratio can be a sign that the dividend might not be sustainable in the long term, especially if the company faces unexpected financial challenges.
In addition, Canadian Utilities has significant debt, with a debt-to-equity ratio of close to 150%. A high level of debt can be risky, particularly in a rising interest rate environment, as it increases the company's interest obligations and limits its financial flexibility. With interest rates likely to remain high, CU may find it difficult to manage its debt load while maintaining its dividend payments and funding new projects.
Finally, Canadian Utilities’ recent earnings report showed a significant decline in IFRS earnings. These fell from $105 million in the second quarter of 2023 to just $62 million in the same period in 2024. While the company’s adjusted earnings saw an increase, the decline in IFRS earnings raises concerns about the consistency and quality of its earnings. For investors, these factors combined could indicate that CU may not be as strong a buy as it once was.
Another option
When comparing Hydro One (TSX:H) Compared to other utility stocks like Canadian Utilities, there are several reasons why Hydro One might be the better choice for investors. First, Hydro One has shown strong financial performance, with consistent revenue growth and rising earnings per share. In the second quarter of 2024, Hydro One reported a 10% year-over-year increase in quarterly earnings, a reflection of its strong operational management and consistent electricity demand in Ontario. This reliability in earnings is critical for investors looking for stable, long-term returns.
Additionally, Hydro One’s infrastructure investments, such as the St. Clair Transmission Line project, position it well for future growth. These projects not only support Ontario’s economic development, but also ensure that Hydro One can continue to meet the region’s growing demand for energy. With significant capital investments and a focus on sustainability, Hydro One is not only maintaining its current operations but is also actively preparing for the future, making it a forward-thinking choice for investors.
Finally, Hydro One’s commitment to shareholder value is evidenced by its regular and growing dividend payments. The company’s dividend yield is competitive, and its track record of consistent payments, backed by a strong financial position, makes it an attractive option for income-focused investors. As the utility sector generally offers lower volatility and consistent returns, Hydro One stands out as a particularly strong contender within this space, especially for those seeking stability and growth potential in their investment portfolio.