3 Reasons Why Fortis Inc. Should Be Atop Your Buy List

Fortis Inc. (TSX:FTS) belongs in your portfolio for the following three reasons.

| More on:
The Motley Fool

Fortis Inc. (TSX:FTS), one of the largest electric and gas utilities companies in North America, has watched its stock underperform the overall market in 2015, falling more than 2% as the TSX Composite Index has risen over 3.5%, but it has the potential to be one of the top performers from this point forward. Let’s take a look at three of the primary reasons why this could happen and why you should consider initiating a long-term position today.

1. Strong first-quarter earnings to support a short-term rally

Fortis announced better-than-expected first-quarter earnings results before the market opened on May 5, but its stock has responded by falling over 2.5% in the weeks since. Here’s a breakdown of 10 of the most notable statistics from the report compared with the year-ago period:

  1. Adjusted net income increased 22.6% to $179 million
  2. Adjusted earnings per share decreased 4.4% to $0.65, surpassing analysts’ expectations of $0.61
  3. Revenue increased 31.6% to $1.92 billion, surpassing analysts’ expectations of $1.89 billion
  4. Revenue increased 167.3% to $727 million in its U.S. Regulated Electric & Gas Utilities segment (including UNS Energy)
  5. Revenue increased 0.6% to $1.05 billion in its Canadian Regulated Electric & Gas Utilities segment
  6. Revenue increased 5.4% to $78 million in its Caribbean Regulated Electric Utilities segment
  7. Cash flow from operating activities increased 69.8% to $450 million
  8. Ended the quarter with $299 million in cash and cash equivalents, and increase of 30% from the beginning of the quarter
  9. Weighted average number of common shares outstanding increased 29.5% to 276.7 million
  10. Ended the quarter with $299 million in cash and cash equivalents, an increase of 30% from the beginning of the quarter

Fortis’ very strong first-quarter performance can be largely attributed to its $4.5 billion acquisition of UNS Energy in August of 2014, which contributed $435 million in revenue, or 94.6% of its total revenue growth for the quarter, but also had a $0.13 dilutive impact on earnings per share.

2. The stock trades at inexpensive forward valuations

At current levels, Fortis’ stock trades at just 18.7 times fiscal 2015’s estimated earnings per share of $2.04 and only 17.7 times fiscal 2016’s estimated earnings per share of $2.16, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 20.5.

I think the stock could consistently command a fair multiple of at least 20.5, which would place its shares upwards of $41.75 by the conclusion of fiscal 2015 and upwards of $44.25 by the conclusion of fiscal 2016, representing upside of more than 9% and 15%, respectively, from today’s levels.

3. A record streak of dividend increases

Fortis pays a quarterly dividend of $0.34 per share, or $1.36 per share annually, giving its stock a 3.6% yield at current levels. The company has also increased its annual dividend payment for 42 consecutive years, the record for a public corporation in Canada, and its increased amount of free cash flow could allow this streak to continue for another 42 years.

Is Fortis the missing piece to your portfolio?

I think Fortis represents one of the best short-term and long-term investment opportunities in the market today. It has the support of strong first-quarter earnings results, its stock trades at inexpensive forward valuations, and it has a 3.6% dividend yield with the longest active streak of annual increases in Canada. Foolish investors should take a closer look and strongly consider making Fortis a core holding today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

More on Dividend Stocks

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »