While Canadian Utilities (TSX:CU) has long been a reliable choice for conservative investors due to its steady dividend and stable performance, it might not be the best option anymore, particularly for those looking for growth. With higher interest rates and increased competition in the utility sector, CU's growth prospects seem more limited. And its stock price has struggled to keep pace with broader market gains. Investors might want to consider whether the dependable dividends are enough to offset the slower growth. Especially when compared to other stocks with more potential for capital appreciation.

Why not CU?

CU has long been a steady performer in the Canadian market, but there are some red flags that potential investors should consider. First, the company's payout ratio is over 90%, which means that nearly all of its earnings are being paid out as dividends. This leaves little room for reinvestment or for maintaining dividend payments if earnings were to decline. A high payout ratio can be a sign that the dividend might not be sustainable in the long term, especially if the company faces unexpected financial challenges.

Plus, Canadian Utilities has a significant amount of debt, with a debt-to-equity ratio nearing 150%. High levels of debt can be risky, particularly in a rising interest rate environment, as it increases the company's interest obligations and limits its financial flexibility. With interest rates possibly remaining high, CU could find it challenging to manage its debt load while also maintaining its dividend payments and funding new projects.

Finally, Canadian Utilities' recent earnings report showed a significant decline in IFRS earnings. These dropped from $105 million in the second quarter of 2023 to just $62 million in the same period of 2024. While the company's adjusted earnings did see an increase, the decline in IFRS earnings raises concerns about the consistency and quality of its earnings. For investors, these factors combined could indicate that CU might not be as strong a buy as it once was.

Another option

When comparing Hydro One (TSX:H) to other utility stocks like Canadian Utilities, there are several reasons why Hydro One might be the better option for investors. First, Hydro One has shown strong financial performance, with steady revenue growth and increasing earnings per share. In the second quarter of 2024, Hydro One reported a 10% year-over-year increase in quarterly earnings – a reflection of its solid operational management and the consistent demand for electricity in Ontario. This reliability in earnings is critical for investors seeking stable, long-term returns.

Moreover, Hydro One's ongoing investments in infrastructure, such as the St. Clair Transmission Line Project, position it well for future growth. These projects not only support economic development in Ontario but also ensure that Hydro One can continue to meet the increasing energy demands in the region. With substantial capital investments and a focus on sustainability, Hydro One is not just maintaining its current operations. It is also actively preparing for the future, making it a forward-looking choice for investors.

Finally, Hydro One's commitment to shareholder value is evident in its regular and growing dividend payouts. The company's dividend yield is competitive, and its history of consistent payments, backed by a strong financial position, makes it an attractive option for income-focused investors. As the utility sector generally offers lower volatility and steady returns, Hydro One stands out as a particularly strong contender within this space, especially for those looking for both stability and growth potential in their investment portfolio.