There was a lot of controversy over the decision of the Ontario government to sell off 15 per cent of publicly owned Hydro One. But there should be no controversy over the quality of this investment, especially for low-risk portfolios. The shares offer a respectable yield, the prospect of modest growth over time, and low downside risk. Although it is now trading at a premium over its IPO price, it's not too late for long-term, income-oriented investors to take a position. Here's everything you need to know about the stock.
The company. Hydro One is Ontario's largest electrical transmission and distribution utility with approximately $23-billion in assets and 2014 revenues of over $6-billion. The company's regulated transmission and distribution operations are owned by Hydro One Inc., a wholly owned subsidiary. Hydro One Inc. delivers electricity to over 1.2 million customers across the province of Ontario and to large industrial customers and municipal utilities.
The stock. Hydro One went public earlier this month at a price of $20.50. The province sold a total of 89.25 million shares, representing 15 per cent of the total issued. Since going public, the stock has moved 11 per cent higher, closing on Friday at $22.73. That indicates the initial pricing was a fairly accurate reflection of the company's value.
The shares trade on the Toronto Stock Exchange under the symbol H. They are also listed on the U.S. over-the-counter Grey Market under the symbol HRNNF.
Why I like it. As mentioned earlier, this is a great stock for conservative investors. It's a regulated utility, which means the downside risk is low. The shares pay an annualized dividend of 84 cents, which works out to a yield of 3.7 per cent at the current price. RBC Capital Markets projects the dividend will increase at an annual rate of between 4 per cent and 4.5 per cent from now until 2019. About the only major negative is the limited growth potential.
This is a stock for income-oriented, buy-and-hold investors. The shares should gradually move higher over the years as the dividend grows but this stock will never produce big capital gains.
Financial statements. Shortly after going public, Hydro One released third-quarter results. They showed revenue of $1.645-billion, up 5.7 per cent from $1.556 billion in the same period of 2014. Net income was $192-million, an 11 per cent improvement over $173-million a year ago. Funds from operations (FFO) came in at $434-million, up from $342-million in the previous year.
For the first nine months of the fiscal year, the company posted revenue of just over $5-billion, a 2.7 per cent improvement over $4.9-billion last year. Net income was $560-million, ahead 6.1 per cent from a year ago, while FFO was almost $1.2-billion, up 23.1 per cent from $971-million in 2014.
Risks. While the downsize risk is low, it is not non-existent. A broad market pullback would lower all boats, including this one. Also, utilities stocks are interest sensitive, so a rise in rates could negatively affect the share valuation. However, it appears unlikely that rates will increase in Canada any time soon.
As this is a regulated company, there is always the possibility that a negative ruling from the regulators could have a significant impact on the bottom line, affecting the share price. There does not seem much likelihood of this happening soon but some analysts have warned it is a possibility down the road.
Dividend. The stock will initially pay a quarterly dividend of 21 cents per share, with the first distribution to be made on or about March 31 to shareholders of record as of March 17. The company expects to maintain a payout ratio of 70 per cent to 80 per cent of net income.
Tax implications. The dividends are eligible for the dividend tax credit if Canadians hold the shares in a non-registered account. U.S. investors will be subject to a 15 per cent dividend withholding tax unless the stock is held within a retirement plan.
Conclusion. If you didn't buy shares at the time of the IPO, you will have to pay a small premium to enter now. However, that should not be an impediment as this is a quality company that should be viewed as a long-term buy-and-hold investment. Ask your financial adviser if it is suitable for you.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape