Down 20% in Six Months, Is This Top Utility Stock a Buy?

A meter measures energy use.

Utility stocks have long been seen as a go-to for safe and secure returns and income. It’s clear why. We need power, and utilities provide them! However, after a rise in share price at the beginning of market volatility, these companies soon fell.

One of these utility stocks was Hydro One (TSX:H). While Hydro One stock is still up by 6% in the last year, shares are down 20% in the last six months. So, let’s look at whether this is one of the utility stocks you should buy or avoid — at least for now.

The climb and the fall

Let’s first look at what happened to cause Hydro One stock to climb and then fall so drastically. After climbing steadily, shares dropped fairly quickly as Hydro One stock reported earnings that fell below estimates.

This was back in April, with results coming in lower than the year before. Earnings per share were 9.6% lower than at the same time in 2022, with first-quarter earnings per share (EPS) coming in lower thanks to higher operation, maintenance and administrative costs. So, while there were other announcements made, this dominated headlines.

While shares have remained down in the last six months, earnings improved during the next quarter. This allowed for a slight increase in share price, sure, but it didn’t last long. Shares are still down 20% in the last six months, despite beating estimates in quarter two.

Analysts predict higher earnings

So, of course, now all eyes are going to be on third-quarter earnings for the company. Will these higher costs continue to weigh on the stock? And, importantly, will it also weigh on its future growth opportunities?

So far, the answer seems to be, “no.” The company broke ground in Chatham on a new transmission line. It also broke ground on a $120-million project in Orillia. So now, with third-quarter earnings set to be released on Nov. 8, analysts believe the company may be on the way to recovering a fair bit. In fact, they predict EPS to increase from $0.44 in the last quarter to $0.54 in the next quarter.

What now?

A lot of the reason that stocks climb and fall is because of institutional investment. These institutions have taken out their cash from Hydro One stock for now, but long-term investors should definitely consider that the stock is a safe long-term investment. Not only that, it’s in the early stages of its growth among utility stocks.

Hydro One stock powers Ontario, with the Ontario government holding a large stake in the company. If that’s safety, I don’t know what is. What’s more, it’s in the renewable energy sector already, so there is no need to make any enormous changes in the near future. These would cause even more costs to come down the line.

Instead, Hydro One stock is growing, stable, and offering long-term returns for investors. It holds a dividend yield of 3.33% and trades at a reasonable 20.13 times earnings as of writing. So, while shares are down 20% right now, remember we’re in a poor market. And when it recovers, you’re likely to see the stock soar right back to where it was and beyond.

The post Down 20% in Six Months, Is This Top Utility Stock a Buy? appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.