Why Fortis Inc. Is the Ideal Hedge Against Economic Uncertainty

Hedge your portfolio against growing econonmic uncertainty by investing in Fortis Inc. (TSX:FTS).

| More on:
The Motley Fool

Growing market volatility and further concerns over the state of the global economy are forcing investors to focus on defensive stocks and companies with strong fundamentals when investing.

One of the best sectors for investors to consider as a means of protecting their portfolio against this economic uncertainty and market volatility is the utilities sector. This is because of the inelastic demand for the services and products provided by utilities, coupled with steep barriers to entry, which protect their competitive advantage.

My preferred Canadian utility investment is electricity provider Fortis Inc. (TSX: FTS). The company possesses a solid underlying business, strong growth prospects, low earnings volatility, and a solid balance sheet. It is these characteristics that give Fortis the ability to reward investors through a regular and steadily appreciating dividend payment.

As you can see, Fortis has hiked its dividend payment almost every year since inception in 1972.

Fortis Dividend History 291014

Source: Fortis Inc.

As a result of these regular dividend hikes, Fortis now pays a dividend with a juicy yield of 3.5% coupled with a sustainable payout ratio of 84%. While the payout ratio may appear a little high to be comfortable, it is calculated using net income and I believe this does not accurately reflect the company’s true ability to sustain the dividend payment.

This because net income includes a number of non-cash items that distort Fortis’ true cash position. I believe operating cash flow offers a far more accurate representation of a company’s ability to meet its liabilities, particularly in a capital-intensive industry like electric utilities. When Fortis’ operating cash flow is substituted for net income, the payout ratio falls to a conservative 22%, indicating the dividend is certainly sustainable.

More impressively, since inception Fortis’ dividend has grown at a compound annual growth rate of 5.6%, well above the annual rate of inflation for that period. This ensures the real rate of return available to investors from Fortis’ dividend payments is not eroded.

As an electric utility, Fortis possesses a wide, multifaceted economic moat that protects its competitive advantage and gives it a degree of pricing control, which helps to reduce earnings volatility.

Perhaps even more significantly, with electricity as a modern necessity its demand is inelastic, shielding Fortis earnings during sustained economic downturns and almost guaranteeing earnings growth when the economy is strong. This further reduces Fortis earnings volatility and bodes well for further dividend hikes.

I believe all of these characteristics make Fortis a solid defensive addition to any share portfolio. With it set to reduce investment volatility while enhancing dividend stability, making it a superb hedge against the current market volatility and economic uncertainty.

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 Matt Smith has no position in any stocks mentioned.

More on Investing

calculate and analyze stock
Investing

Prediction: My 2 Top TSX Stocks to Beat the Market in 2024 and Beyond

Any investment is a prediction on the future of stock. Here are two stocks that should deliver predictably strong returns…

Read more »

Retirees sip their morning coffee outside.
Retirement

Here’s the Average RRSP Balance at Age 71 in Canada

If you hold stocks like Fortis Inc (TSX:FTS) in an RRSP, you pay no dividend and capital gain tax until…

Read more »

Dividend Stocks

2 REITs to Buy to Earn Like a Lazy Landlord

Becoming a landlord and managing the property yourself may give you the most direct exposure, but it also comes with…

Read more »

money cash dividends
Dividend Stocks

Beat the TSX Immediately With This Cash-Gushing Dividend Stock

This dividend stock has already beat the TSX today, even from 52-week lows. But it could only be the beginning.

Read more »

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Retirement

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins
Investing

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »