CPX:CC - My 2 Favourite TSX Utility Stocks for October 2023
2023-10-07 09:00:00 ET
TSX utility stocks have sold off meaningfully roughly over the course of the last year and a half. It has become increasingly challenging to buy and hold these stocks, as interest rates have increased. Some utilities even saw their credit rating get re-rated one notch lower. At the same time, because of the stock market correction , their dividend yields have bumped up. Surely, the dividend income of these utilities offers decent value to investors in a higher inflationary environment.
Here are a couple of utilities that look particularly interesting this month after the recent selloff.
Capital Power stock
Capital Power ( TSX:CPX ) could be a plausible utility stock to buy this month. It generates resilient cash flows from a portfolio of assets with contracted and merchant power generation. Specifically, it has owned generation of 7,500 megawatts (MW) — about 68% natural gas and 20% renewables. It maintains an investment grade S&P credit rating of BBB-.
Capital Power stock is a Canadian Dividend Aristocrat. For your reference, its five-year dividend-growth rate is 6.9%. And it believes it can continue with dividend growth of about 6% per year through 2025.
It has been trading in a downward channel since May 2022. After dipping over 11% over the last three weeks, it now trades at the bottom of the channel and could provide investors with a trading opportunity.
Importantly, even if investors are required to hold shares in a downturn, it offers an above-average dividend yield of almost 6.7% at $36.72 per share at writing. At this quotation, analysts believe it trades at a meaningful discount of approximately 25%. Notably, the $40-41 range technically acts as a resistance in the short term.
A more defensive utility stock
For a more defensive utility stock, consider Fortis ( TSX:FTS ). The regulated electric and gas utility has a long track record of dividend growth. Specifically, it has increased its dividend for close to half a century. For your reference, its five-year dividend-growth rate is 6.0%. Management targets to increase its common stock dividend by 4-6% per year through 2028.
Because 99% of its assets are regulated, Fortis’s earnings tend to be stable and predictable. As well, 93% of its assets are for distribution or transmission, which provide essential services through economic cycles.
The stock continues to command a premium price-to-earnings ratio (P/E). However, the valuation is already relatively cheap versus its trading history. The stock’s long-term, normal P/E is about 19.4 times adjusted earnings. At $50.63 per share at writing, it trades at about 16.9 times adjusted earnings. At this quotation, it offers reasonable value and a dividend yield of almost 4.7%. Analysts believe it trades at a discount of about 14%.
Usually, when a market recovery occurs, the first group of stocks that benefit are the quality ones. Surely, Fortis would be one of the top utility stocks to experience a rally then.
Investor takeaway
Between the two utilities, Capital Power may provide a quicker turnaround for the potential of a short-term trade, given the higher volatility of the stock. Fortis is the more blue-chip stock to choose for the most conservative investors looking for a long-term total return of about 9-10% per year.
The post My 2 Favourite TSX Utility Stocks for October 2023 appeared first on The Motley Fool Canada .
Fool contributor Kay Ng has positions in Fortis. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy .
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