Although the benchmark S&P/TSX Composite Index has gained more than 10% this year, renewed geopolitical tensions in the Middle East, persistent inflation, and slowing global economic growth continue to cloud the outlook. In this environment, investors may want to strengthen their portfolios with high-quality dividend stocks that offer a stable, reliable stream of passive income.
That said, dividends are never guaranteed. Investors should therefore focus on companies with resilient business models, dependable cash flows, and a proven track record of consistently growing their dividends. Such businesses are generally better equipped to withstand economic uncertainty while continuing to reward shareholders with reliable income.
Against this backdrop, let’s examine Hydro One (TSX:H) by assessing its business outlook, financial performance, dividend track record, and long-term growth prospects to determine whether the stock represents an attractive buying opportunity right now.
Hydro One’s business outlook
Hydro One is a pure-play electricity transmission and distribution utility serving approximately 1.5 million customers across Ontario, with no exposure to power generation. Around 99% of its business is rate-regulated, and its current regulatory framework has been in place for more than five years. This highly regulated business model, combined with its focus on low-risk transmission and distribution assets, provides stable, predictable earnings largely insulated from macroeconomic uncertainty and commodity price fluctuations.
The company has also consistently expanded its rate base, driving steady financial growth and shareholder returns. Over the past five years, Hydro One has generated a total return of approximately 125%, representing an annualized return of 17.5%. In addition to strong share price appreciation, the company has increased its dividend nine times since 2017 and currently offers a forward dividend yield of 2.39%. Let’s now examine its recent financial performance.
Hydro One’s first-quarter performance
Hydro One delivered a solid first-quarter performance, with revenue increasing 11.2% year over year to $2.4 billion. Revenue net of purchased power also rose 11% to $1.2 billion, supported by new Ontario Energy Board (OEB)-approved electricity rates and higher average monthly demand. During the quarter, the company invested $735 million in capital projects and placed $423 million of new assets into service, further expanding its regulated asset base.
Operating costs also moved higher. Operations, maintenance, and administration (OM&A) expenses increased by $10 million year over year, primarily due to higher information technology-related spending. Depreciation, amortization, and asset removal costs also rose as additional capital assets entered service. Meanwhile, financing costs increased by approximately 20% to $592 million, reflecting higher long-term debt levels and a higher weighted-average interest rate.
Despite these headwinds, Hydro One continued to deliver healthy earnings growth. Net income attributable to common shareholders increased to $358 million, while earnings per share (EPS) rose 22% year over year to $0.60. Supported by a healthy investment-grade credit rating and ample liquidity, the company remains well-positioned to fund its capital investment program and support future growth. Next, let’s examine its long-term growth prospects.
Hydro One’s growth prospects
The Independent Electricity System Operator (IESO) projects that Ontario’s electricity demand will increase by approximately 65% by 2050, driven by reindustrialization, population growth, and accelerating electrification. This long-term demand growth will require significant investments in the province’s electricity infrastructure, creating a favourable backdrop for Hydro One.
To capitalize on this opportunity, Hydro One is expanding its regulated asset base through 15 transmission projects currently at various stages of development and construction. The company is also investing in its distribution network to accommodate rising electricity demand driven by population growth and ongoing residential and commercial development across its service territory. Therefore, the company’s growth prospects look healthy.
Investors’ takeaway
Hydro One has delivered an impressive 24% return over the past 12 months. Despite this strong share price appreciation, its valuation remains reasonable, with its next-12-month price-to-sales and price-to-earnings multiples at 3.8 and 25.5, respectively.
Given its resilient regulated business model, predictable cash flows, visible long-term growth pipeline, consistent dividend growth, and reasonable valuation, I believe Hydro One remains an attractive investment for long-term investors, even amid the current uncertain economic environment.
