Canadian Utilities (TSX) has long been a favored option for conservative investors, thanks to its steady dividend payouts and stable performance. However, recent developments suggest that it may not be the optimal choice for those seeking growth. With rising interest rates and increased competition in the utility sector, CU’s growth prospects appear more constrained. The company’s stock price has also struggled to keep up with broader market gains, raising questions about whether its reliable dividends are sufficient to compensate for slower growth. Here’s a closer look at why Canadian Utilities might not be the best investment choice right now.
Table of Contents
Why Not CU?
Canadian Utilities has been known for its reliability, but there are several red flags that potential investors should consider:
High Payout Ratio
Canadian Utilities has a payout ratio exceeding 90%, meaning nearly all of its earnings are distributed as dividends. This high payout ratio leaves minimal room for reinvestment or for maintaining dividend payments if earnings decline. A consistently high payout ratio can signal potential risks to dividend sustainability, particularly if the company encounters unexpected financial difficulties.
Significant Debt Load
The company is burdened with a substantial amount of debt, evidenced by a debt-to-equity ratio nearing 150%. High levels of debt pose significant risks, especially in a rising interest rate environment. Increased interest obligations can strain financial resources and limit the company’s ability to manage its debt, maintain dividend payments, and fund new projects. With interest rates expected to stay elevated, Canadian Utilities may struggle to balance these demands.
Declining IFRS Earnings
Recent financial reports reveal a troubling decline in International Financial Reporting Standards (IFRS) earnings. In the second quarter of 2024, IFRS earnings dropped from $105 million in 2023 to just $62 million. Although adjusted earnings saw an increase, the decline in IFRS earnings raises concerns about the consistency and quality of the company’s financial performance. For investors, these factors could suggest that Canadian Utilities may not be as robust a buy as it once was.
Another Option: Hydro One (TSX)
When compared to Canadian Utilities, Hydro One presents several advantages that make it a potentially better investment choice for those seeking stability and growth.
Strong Financial Performance
Hydro One has demonstrated solid financial performance, marked by steady 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. This reflects effective operational management and consistent electricity demand in Ontario. For investors prioritizing stable, long-term returns, Hydro One’s reliability in earnings is a significant advantage.
Best StBest Stocks to Buy with $500 Right Nowocks to Buy with $500 Right Now
Maximize Your TFSA: 3 Must-Own TSX Stocks for Your $7,000 Contribution
Artificial Intelligence (AI) Stocks Soar Following U.S. Federal Reserve Rate Cuts
Exploring Passive Income Beyond Dividends: Embracing AI Stocks
$108.26 Monthly Passive Income: Invest $15,000 in This Top Dividend Stock
Strategic Investments in Infrastructure
Hydro One’s commitment to infrastructure development, such as the St. Clair Transmission Line Project, positions the company well for future growth. These investments not only support economic development in Ontario but also ensure Hydro One can meet the region’s increasing energy demands. With substantial capital investments and a focus on sustainability, Hydro One is preparing for the future, making it an appealing choice for forward-thinking investors.
Competitive Dividend Payouts
Hydro One’s commitment to shareholder value is evident through its regular and increasing dividend payouts. The company offers a competitive dividend yield, supported by a robust financial position. This makes Hydro One an attractive option for income-focused investors seeking both stability and growth potential.
While Canadian Utilities has been a reliable investment in the past, current factors such as a high payout ratio, significant debt, and declining earnings raise concerns about its future prospects. In contrast, Hydro One offers strong financial performance, strategic investments, and competitive dividends, making it a compelling alternative for investors seeking both stability and growth. As the utility sector continues to evolve, Hydro One stands out as a particularly strong choice within this space.