Hydro One Ltd. is on a tear and there is a good reason why: The Ontario government finally appears to have left the utility alone.
The shares have surged 24.6 per cent over the past 12 months (not including dividends), ploughing through recent market volatility.
The performance has easily beaten the broad S&P/TSX Composite Index, which is essentially flat over the same period. The shares have also beaten the Canadian utilities sector by 6.8 percentage points, suggesting that Hydro One’s outperformance is being driven by something other than falling interest rates and a rush into economically defensive sectors.
That other something is Ontario Premier Doug Ford, who has enormous influence over the utility given that the province owns a 47-per-cent stake.
Mr. Ford made Hydro One and its then-chief executive officer, Mayo Schmidt, a key issue during the provincial campaign last year, after he conflated high consumer electricity prices with the CEO’s pay.
The political meddling continued after Mr. Ford’s Progressive Conservative Party won the election in June, 2018. It sent Mr. Schmidt and the entire board of directors out the door in July and effectively scuttled Hydro One’s plans to expand into the United States with a deal for Avista Corp., which is based in Washington State.
The meddling weighed heavily on Hydro One’s stock, too. The shares – already struggling because of rising interest rates in 2018, which made slow-growing dividend stocks looks relatively less attractive next to bonds – hit a record low of $18.84 on July 27, 2018, two weeks after Mr. Schmidt announced his retirement.
Clearly, many investors (full disclosure, I’m among those owning shares) were concerned that Hydro One would remain hobbled by political risks. Analysts, who had been bullish on the stock in 2017, were far more cautious by mid-2018: Most “buy” recommendations vanished and target prices fell by nearly 20 per cent.
But the past several months have been blissfully quiet for investors. The Ontario government appears to have backed off from this particular file – mission accomplished, Mr. Ford? – and his silence is doing wonders for investor sentiment. The shares are now trading near two-year highs and are comfortably above their 2015 initial public offering price of $20.50.
Now, investors can look at Hydro One without being distracted by Mr. Ford and they should be able to recognize several reasons to stick with the stock.
Although Hydro One’s valuation is no longer pointing to a bargain, the stock is still attractive. The dividend, which has been rising at a slow-but-steady clip each year, yields 4.1 per cent. That’s more than the 3.1-per-cent dividend yield for the S&P/TSX and in line with the 4.3-per-cent yield for the utilities sector.
Based on its price-to-earnings ratio, the stock also looks reasonable: It trades at 16.2-times estimated 2019 earnings from CIBC World Markets, which is below the five-year average P/E of 17. And it’s hard to see much ebullience among analysts: There’s just one “buy” recommendation among the 13 analysts following the stock, according to Bloomberg. And the consensus target price of $23.80 implies no further gains in the share price. In other words, optimism hasn’t kicked in yet.
After its leadership upheaval last year, Hydro One has a new board and CEO and they won’t reveal their strategic direction until this fall. But new CEO Mark Poweska last week underscored a commitment to cutting costs, which has been a key reason to invest in the utility since its IPO.
Lastly, Hydro One is in the right place at the right time: Investors are renewing their interest in stable, dividend-generating companies now that bond yields are plunging and economic warning signs are flashing red. If the North American economy slips into a recession, Hydro One’s financial performance should hold up relatively well.
And the less investors hear from Mr. Ford, the better.