The formula to investing success is relatively simple. Identify and invest in stocks which are trading at a discount to the intrinsic value of their underlying business, have stable earnings and a wide economic moat.
An important attribute of companies which possess these characteristics are their ability to continue rewarding loyal investors year after year and have done so for decades.
One company that stands out for all of these reasons is Canadian electric utility Fortis Inc. (TSX: FTS).
Its strengths boil down to a few key points.
First and foremost, its business is impossible to replicate. Not only does it require a considerable capital investment to commence operations in the electric utilities industry, but it is heavily regulated. For these reasons the electric utility industry has steep barriers to entry which minimize competition and protect Fortis’ competitive advantage.
Second, Fortis’ business is effectively recession-proof. Electricity is an essential component of our modern lives, without which society would essentially cease to function. This makes demand for electricity inelastic and essentially immune to the vagaries of the economic cycle or the ups and downs of the economy.
Not only does this reduce its earnings volatility and give Fortis a degree of pricing control but it essentially guarantees future earnings growth when coupled with its growth strategy.
More importantly for investors, Fortis has continued to expand its business through a range of acquisitions, the most recent being the acquisition of UNS Energy Corporation. This has boosted its presence in Arizona, giving it a regulated energy delivery and electricity asset with approximately 657,000 electricity and gas customers.
Third, and the the real reason for holding Fortis, is the company’s ability to keep hiking its dividend. Since commencing dividend payments in 1972, Fortis has hiked its dividend almost every year. Even through the global financial crisis when other companies were slashing or even terminating their dividends as a means of preserving capital Fortis continued to hike its dividend. This gives it a solid dividend yield of 3.4% coupled with a sustainable payout ratio of 84%.
I also expect Fortis to continue hiking its dividend as it beds down the acquisition of UNS Energy, which coupled with its wide economic moat and the inelastic demand for electricity, will see earnings grow over the long-term.
Fortis is a dividend machine, which continues to reward investors with regular dividend hikes and a yield in excess of other investments which are perceived as lower risk such as treasuries and cash. This is one company investors should buy and hold forever, reaping the benefits of the steadily growing income stream coupled with solid potential for capital growth.
