Is it a good company at a reasonable price? This will probably be a good utility to invest in. They are growing their dividends and intend to continue to do that. However, I think that the current stock price is relatively expensive.
I do not own this stock of Hydro One Ltd (TSX-H, OTC-HRNNF). It is a utility stock and has been recommended by various persons. It is on the Money Sense list with a C. Rating. It appeared in the Stable Dividend Portfolio when Norman Rothery originally wrote about it in December 21, 2022.
When I was updating my spreadsheet, I noticed that the Liquidity Ratios are very low. The current ratio is 0.51. The 9 year median is 0.51. Even add in cash flow after dividends it does not even get it to 1.00 (only 0.96). Only adding back in the current portion of the current debt do you get past 1.00. In 2022 this gets you to a low ratio of 1.15. It is best at 1.50. When this ratio is under 1.00, it means that current assets cannot cover current liabilities. Having very low Liquidity Ratios can cause problems in bad economic times. This can occur if debt holders cannot roll over the current debt. (I guess you can assume this will not happen as long as the Ontario government owns shares in this company.)
If you had invested in this company in December 2015, for $1,003.05 you would have bought 45 shares at $22.29 per share. In December 2022, after 7 years you would have received $308.90 in dividends. The stock would be worth $1,632.15. Your total return would have been $1,941.05.
| Cost | Tot. Cost | Shares | Years | Dividends | Stock Val | Tot Ret |
|---|---|---|---|---|---|---|
| $22.29 | $1,003.05 | 45 | 7 | $308.90 | $1,632.15 | $1,941.05 |
The current dividend yield is moderate (2% to 4% ranges) at 3.90%. The 5, 6 and historical dividend yields are also moderate at 3.91%, 3.91% and 3.91%. The dividends are increased at a low rate (below 8%) at 2.9% per year for the past 5 years. The last dividend increase was in 2022 and it was for 5%.
The Dividend Payout Ratios (DPR) are fine with the one AEPS being probably the most important. The DPR for EPS for 2022 is 63% with 5 year coverage at 67%. The DPR for Adjusted Earnings per Share (AEPS) for 2022 if 63% with 5 year coverage at 65%. The DPR for Funds from Operations (FFO) for 2022 is 30.22% with 5 year coverage at 33%. The DPR for Cash Flow per Share (CFPS) for 2022 is 29% with 5 year coverage at 30%. The DPR for Free Cash Flow for 2022 could be 380% with 5 year coverage at 663% according to one site.
Debt Ratios are mostly fine, but the company should improve their Liquidity Ratio. The Long Term Debt/Market Cap Ratio for 2022 is 0.60 and is fine. The Debt Ratio for 2022 is good at 1.57. The Debt/Equity and Shareholders' Equity Ratios are 2.78 and 1.77 respectively and these are fine.
The Liquidity Ratio is 0.51. Even adding in Cash Flow after dividends gets you to 0.96. You must add back in the Current Portion of the Long Term Debt to get to 1.15 and even this is low because I like the ratio to be 1.50 or higher. A problem to adding back the Current Portion of The Long Term Debt is that in bad times, the company might not be able to just rollover their debt. Although, I must admit utilities do not seem to have had a problem with this traditionally and the Ontario government owns lots of shares in this company.
The Total Return per year is shown below for years of 5 to 08 to the end of 2022. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.
| From | Years | Div. Gth | Tot Ret | Cap Gain | Div. |
|---|---|---|---|---|---|
| 2017 | 5 | 4.90% | 13.83% | 10.12% | 3.56% |
| 2015 | 8 | 2.20% | 9.71% | 6.68% | 3.69% |
The 5-year low, median, and high median Price/Earnings per Share Ratios are 15.45, 17.80 and 20.15. The corresponding 7 year ratios are 16.04, 18.16 and 20.30. The current P/E Ratio is 21.65 based on a stock price of $38.54 and EPS estimate for 2023 of $1.78. The current ratio is above the high ratio of the 7 year median ratios. This stock price testing suggests that the stock price is relatively expensive.
I also have Adjusted Earnings per Share (AEPS) data. The 5-year low, median, and high median Price/Adjusted Earnings per Share Ratios are 14.02, 16.99 and 20.7. The corresponding 8 year ratios are 16.60, 18.52 and 20.07. The current P/AEPS Ratio is 21.65 based on a stock price of $38.54 and AEPS estimate for 2023 of $1.78. The current ratio is above the high ratio of the 8 year median ratios. This stock price testing suggests that the stock price is relatively expensive.
I also have Funds from Operations (FFO) data. The 5-year low, median, and high median Price/FFO Ratios are 7.82,8.74 and 9.89. The corresponding 8 year ratios are 7.83, 8.77 and 9.77. The current P/FFO Ratio is 10.54 based on a stock price of $38.54 and FFO for the last months 12 months of $3.66. The current ratio is above the high ratio of the 8 year median ratios. This stock price testing suggests that the stock price is relatively expensive.
I get a Graham Price of $27.27 . The 8-year low, median, and high median Price/Graham Price Ratios are 1.02, 1.07 and 1.16. The current P/GP Ratio is 1.33 based on a stock price of $38.54. The current ratio is above the high ratio of the 8 year median ratios. This stock price testing suggests that the stock price is relatively expensive.
I get an 8-year median Price/Book Value per Share Ratio of 1.41. The current P/B Ratio is 2.04 based on a stock price of $38.54, Book Value of $11,306M and a Book Value per Share of $18.88. The current ratio is 45% above the 8 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I also have an estimate for the Book Value per Share for 2023 of $19.40. This implies a P/B Ratio of 1.99 with a stock price of $38.54 and Book Value of $11,615M. This ratio is 41% above the 10 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I get an 8-year median Price/Cash Flow per Share Ratio of 8.10. The current P/CF Ratio is 10.25 based on an Cash Flow per Share estimate for 2023 of $3.76, Cash Flow of $2,251M and a stock price of $38.54. The current ratio is 27% above the 8 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
I get an 8-year median dividend yield of 3.91%. The current dividend yield is 2.90% based on a stock price of $38.54 and dividends of $1.1184. The current yield is 26% below the 8 year median dividend yield. This stock price testing suggests that the stock price is relatively expensive.
The 8-year median Price/Sales (Revenue) Ratio is 2.13. The current ratio is 2.89 based on Revenue estimate for 2023 of $7,995M. The current ratio is 35% above the 8 year median ratio. This stock price testing suggests that the stock price is relatively expensive.
Results of stock price testing is that the stock price is probably expensive. I know that there is not much data on this stock because it has only been on the TSX for a limited period. However, the dividend yield test and the P/S Ratio tests agree that the stock price is relatively expensive. In fact, all the tests agree the stock price is relatively expensive. Even the analysts seem to say this when the 12 month stock price given is below the current stock price.
When I look at analysts’ recommendations, I find Strong Buy (4), Buy (1), Hold (9) and Underperform (1). The 12 month stock price consensus is $37.77. This implies a total return of $0.90% with a capital loss of 2.00% and dividends of $2.90%.
Most analysts like this stock on Stock Chase. However, one analyst, Michael Sprung does not like it because he thinks it is politicized. Stock Chase gives this stock 4 stars out of 5. Amy Legate-Wolfe on Motley Fool says to buy for income and growth. Joey Frenette on Motley Fool says this dividend stock is selling at a fair price. The company gives a press release via Newswire about their fourth quarter of 2022.
Simply Wall Street on Yahoo Finance says this stock is selling 34% above its intrinsic value. Simply Wall Street gives 2 warnings on this stock of debt is not well covered by operating cash flow; and dividend of 2.87% is not well covered. Simply Wall Street gives this stock 3 stars out of 5.
Hydro One operates regulated transmission and distribution assets in Ontario. The province of Ontario holds an approximate 47% common equity stake. Its web site is here Hydro One Ltd.
The last stock I wrote about was about was AltaGas Ltd (TSX-ALA, OTC-ATGFF) ... learn more. The next stock I will write about will be BCE Inc (TSX-BCE, NYSE-BCE) ... learn more on Monday, April 3, 2023 around 5 pm.
This blog is meant for educational purposes only and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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