Hydro One (TSE:H): A Regulated Utility Gem with Undervalued Potential?

The electric utility sector has long been a haven for income-seeking investors, but few names in Canada offer the combination of regulated stability and dividend growth potential like Hydro One (TSE:H). Despite a recent dip in market sentiment, the company's five-year track record—boasting a 128% total shareholder return (TSR) including dividends—hints at a valuation gap worth exploring. Let's dissect whether its fundamentals justify a buying opportunity now.

Fundamentals: A Steady Hand in a Volatile Market

Hydro One, Ontario's largest electricity transmission and distribution provider, operates under a regulated utility model that inherently stabilizes cash flows. This structure, where returns are tied to cost-of-service agreements, has enabled the company to grow earnings per share (EPS) at a 6.9–8.1% annual clip over the past five years. Even as revenue grew modestly (4.3% annually), its net margins expanded to 14% in 2025, a sign of operational efficiency.

Dividend Reliability:
While the current dividend yield of 2.5% lags the industry average, Hydro One's dividend growth is steady. Since 2016, dividends have compounded at a 4.4% CAGR, with the latest quarterly payout rising to CA$0.3331 per share. Crucially, the payout ratio remains 26%, comfortably covered by forecasted earnings. The company's Dividend Reinvestment Plan (DRIP) also provides flexibility for long-term investors.

CEO Compensation and Governance:
A subtle but overlooked advantage: Hydro One's CEO compensation ranks among the lowest in the utility sector, with total pay (including equity incentives) at $2.4 million in 2024—far below peers like Fortis or Emera. This signals a shareholder-focused culture, which aligns with the company's regulated mandate.

Market Perception: Why the Disconnect?

Despite these positives, Hydro One's stock has underperformed expectations in 2025, with shares down 8% year-to-date amid broader market volatility. Two factors cloud its narrative:

1. Debt Concerns:
   With a debt-to-equity ratio of 1.4x, Hydro One's leverage is moderate but not insignificant. While manageable under its regulated model, rising interest rates could pressure borrowing costs.

2. Valuation Skepticism:
   Analysts cite the stock as 21% overvalued based on historical multiples, but this overlooks its regulatory tailwinds. The company's 2025–2027 earnings guidance (6–8% annual EPS growth) suggests it's undervalued relative to peers.

The Case for a Re-Rating

Why Buy Now?
- Regulated Growth: Its asset base—critical infrastructure serving 1.4 million customers—ensures steady revenue, even in downturns.
- Infrastructure Pipeline: Investments in grid modernization and renewable integration (e.g., Ontario's 2030 net-zero targets) will drive future earnings.
- Undervalued Multiples: At 15x forward P/E, Hydro One trades below its five-year average and lags peers like Fortis (FTS.TO) at 22x.

Risks to Monitor:
- Debt management and interest rate exposure.
- Regulatory approvals for rate hikes, which directly impact profitability.

Investment Thesis

Hydro One is a contrarian play for income investors. While risks like debt and market sentiment shifts exist, the regulated model and dividend discipline suggest a 20–25% upside over two years as the market revalues it. Buy now, but avoid leverage until cash flow sustainability is clearer.

For conservative investors, the DRIP offers a low-risk entry point, while those with a medium-term horizon could accumulate shares near $50, targeting a $60–$65 price target by 2026.

Final Take: Hydro One's fundamentals are stronger than its current valuation implies. As Ontario's energy transition accelerates, this utility giant could finally earn its place as a top-tier income stock.

Disclosure: Research-based analysis; not financial advice. Consult a professional before investing.