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Friday’s TSX breakouts: A defensive dividend stock with potential catalysts on the horizon

Dividend policy

The company pays its shareholders a quarterly dividend of 21 cents per share, or 84 cents on a yearly basis. This equates to an annualized yield of 3.5 per cent.

Management targets a payout ratio of between 70 per cent and 80 per cent. The dividend appear secure with room to expand given its stable cash flows derived from its rate-regulated operations.

Analysts’ recommendations

Since the beginning of the year, 15 firms have issued research reports on the company, of which, five analysts have “buy” recommendations and 10 analysts have “hold” recommendations.

The 15 firms providing recent research coverage are as follows in alphabetical order: Barclays, BMO Capital Markets, CIBC World Markets, Credit Suisse, Desjardins Securities, Edward Jones, Industrial Alliance Securities, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, TD Securities, Veritas Investment Research, and Wells Fargo Securities.

Revised recommendations

In February, several analysts revised their target prices higher. Linda Ezergailis, the analyst from TD Securities, lifted her target price to $23 from $22. Darryl McCoubrey, the analyst from Veritas Investment Research, bumped his target price to $26.50 from $24. Robert Catellier, the analyst from CIBC World Markets, raised his target price by $2 to $27, and Mark Jarvi, the analyst from Desjardins Securities increased his target price to $25 from $24.

Financial forecasts

The Street is forecasting steady earnings for the company. The consensus earnings per share estimates are $1.21 for 2017, unchanged from $1.21 reported in 2016, and $1.30 for 2018.

Given the company’s high earnings visibility and stability, earnings revisions have been modest. For instance, three months ago, the consensus EPS estimates were $1.22 for 2017 and $1.31 for 2018.

Valuation

According to Bloomberg, the stock is trading at a price-to-earnings (P/E) multiple of 19.8 times the 2017 consensus estimate, below its one-year historical average P/E multiple of 20.5 times. Over the past year, the stock has traded at a forward P/E multiple ranging from a low of 18.5 times to a high of 22.5 times.

Individual target prices for Hydro One range from a low of $23 (at TD Securities) to a high of $29 (at RBC Capital Markets). Hydro One’s average one-year target price is $25.85, implying there is 8 per cent upside potential in the share price over the next 12 months.

In comparison, industry peer, Fortis Inc. (FTS-T) is trading at a P/E multiple of 17.5 times the 2017 consensus estimate.

Insider transaction activities

There have been no insider transaction activities reported in 2017; however, two insiders were purchasing shares around the stock’s current price in December. On December 23, David Denison, the chairman of the board of directors, purchased 1,000 shares at an average price of $23.53 per share, and board member, James Hinds, purchased 5,000 shares.

Chart watch

Year to date, the stock price is up just 2 per cent, underperforming many of its peers and the overall sector return. The S&P/TSX utilities index is up 5 per cent year-to-date.

That being said, the share price recently broke out of a downtrend that has been in place for the past two months.

The stock price has initial overhead resistance around $24.50, near its 200-day moving average (at $24.53). After that ,there is resistance between $26 and $26.50.

In terms of downside support, there is initial support around $23.50, close to its 50-day moving average (at $23.76). Failing that, there is strong support between $22.65 and $23.

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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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