What are we looking for?
Utility companies (electricity, natural gas, water and renewable providers) are considered defensive investments because of stable demand and predictable cash flows. These stocks are sensitive to interest rates, regulation and capital structures, which makes their valuations unique.
Let’s look at common valuation factors and what the StockCalc models are telling us for valuations here.
The screen
We used StockCalc’s screener to select the top 10 listed utility companies by market capitalization on the Toronto Stock Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.
Overview of the techniques used:
- Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value per share;
- a price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
- an adjusted book value (ABV) is calculated by multiplying book value per share by its 10-year average price-to-book ratio;
- if we have analyst coverage, we may consider the consensus target price;
- for this industry I have also added the dividend discount model (DDM column in the table) value for each stock (DDM is as of Sept. 30). This formula is most applicable to mature companies with consistent dividend growth. The formula is: expected dividend in next year/(cost of equity – dividend growth rate).
More about StockCalc
StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code “Globe30,” which offers a 30-day free trial and special pricing for the second month.
Valuation Background
There are a number of key factors that affect the valuation of utilities, including:
Regulation status and regulatory environment: Regulated utilities have stable, government-approved returns but limited growth. Unregulated and merchant utilities rely on market pricing for higher potential upside but more risk.
Interest rates and inflation: Utilities are bond proxies wherein higher interest rates lead to lower valuations, since dividends compete with bond yields. The market is pricing in three interest rate cuts in the United States for 2026, with the expectation the Federal Reserve will not cut at its December meeting. The Fed’s current target rate range is 375 to 400 basis points, or 3.75 to 4 per cent.
The Bank of Canada will also make an interest rate announcement on Dec. 10; its current benchmark rate is 2.25 per cent and is expected to stay that way at the December meeting.
Capital intensity: Heavy debt financing makes leverage, credit ratings and interest costs critical valuation inputs. Utilities can carry a very high debt-to-total-capital ratio when cash flows are as stable as they are in this industry.
Dividend stability: Dividend payout policies and, more importantly, their stability affect pricing significantly for this industry.
What we found
You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc valuation column is a weighted calculation derived from our models and analyst target data if used. Let’s look at a couple of these companies:
Fortis Inc. FTS-T was founded in 1885 and is headquartered in St. John’s. Fortis operates as an electric and gas utility company in Canada, the United States and the Caribbean, generating, transmitting and/or distributing electricity to customers in those regions. It has approximately 185,300 kilometres of electrical transmission and distribution lines, 59,100 km of natural gas lines and a total generation capacity of 4,243 megawatts.
On Nov. 4, it announced its third-quarter results, which included net earnings of $409-million, or 81 cents a common share, as well as its capital plan for 2026 to 2030 of $28.8-billion. It also increased the fourth-quarter common share dividend by 4.1 per cent and extended annual dividend growth guidance of 4 to 6 per cent through 2030.
Our models are mixed on FTS, with the overall valuation slightly less than current price.
Brookfield Infrastructure Partners LP BIP.UN-T engages in the utilities, transport, midstream and data businesses. The utilities segment operates approximately 2,900 km of electricity transmission lines, 3,900 km of natural gas pipelines, 8.4 million electricity and natural gas connections and 700,000 long-term contracted sub-metering services.
It operates in the United States, Canada, India, Britain, Brazil, Colombia, France, Australia, Germany and other locations internationally. The company was incorporated in 2007 and is based in Hamilton, Bermuda.
Our models are both above and below the current price, with our weighted average valuation 7.9 per cent higher than the current price.
Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.