Utilities output also probably slipped in April, having been up on below-normal temperatures earlier in the year.SIPHIWE SIBEKO/Reuters
The threat of rising interest rates this year isn't exactly the kind of environment that utility stocks, which tend to carry a high debt load, shine in.
But Desjardins Securities analyst Jeremy Rosenfield thinks there's little reason for investors to start ditching holdings in a sector known for its reliable income and stable - albeit unspectacular - growth.
He thinks the underlying economic outlook for 2014 is favourable for the Canadian utility and power sector, as well as for energy infrastructure stocks, despite decent odds that interest rates will move upwards.
Access to capital for these firms should remain firm and their strong market valuations could allow for more merger and acquisition activity, with a likely focus on U.S. expansion opportunities for both regulated utilities and independent power producers, he believes.
On the negative side, a sluggish regulatory environment should put a lid on higher allowed return on equity rates over the near term for most regulated utilities.
"Given the expected underlying macroeconomic environment and sector outlook, we believe investors should focus on companies with visible cash flow growth profiles (and strong free cash flow growth), relatively inexpensive valuations and the ability to return cash to shareholders through dividends," Mr. Rosenfield said in a research note.
His top pick: Algonquin Power & Utilities Corp. Its free cash flow per share is expected to roughly double in 2014, and grow by about 10 per cent annually over the following two years, thanks in part to recent acquisitions and new power projects under contract. While the company offers a handsome yield of about 5 per cent, it only represents about 50 per cent of its free cash flow payout - and there's potential for the dividend to grow.
In addition, its shares trade at a relatively inexpensive 8 times estimated 2014 cash flow and 7 times 2015 cash flow - below its peer group. His price target is $9.
Mr. Rosenfield also highlighted Innergex Renewable Energy, Northland Power Inc. and Boralex Inc. as buys right now, given they fit his free cash flow growth, valuation and total return criteria over a longer-term horizon. He has price targets on the three utilities of $12, $20, and $12, respectively.
Darcy Keith