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Utilities are among the safest companies to invest in because they provide a service that fills a need and not a want. The best of the best is Fortis Inc. (TSX:FTS). It is a leader in electric and gas utilities in North America. It is also the top holding in the iShares S&P/TSX Capped Utilities Index Fund, making up about 24% of the fund.
Fortis is a low-risk regulated utility business that maintains a strong balance sheet with an investable grade S&P credit rating of A-.
Shareholder returns and dividend
Fortis outperformed the market in the last decade. It returned an average of 12% per year, while in the same period the S&P 500 Utilities (Sector) returned 9.6%, and the S&P/TSX Capped Utilities Index returned 8.4%.
Fortis paid the longest streak of growing dividends in Canada with 42 consecutive years of annual dividend increases. Recent dividend-growth rates have been in the 3-4% range. So, Fortis qualifies for an inflation-beating investment to maintain your purchasing power.
Fortis offers a solid 3.4% yield, paying out about 71% of its earnings. This payout ratio is sustainable.
At the end of 2014 Fortis’ total assets were worth $26.6 billion, with 93% regulated. Under its regulated business, Fortis has 1.9 million electric customers and 1.2 million gas customers. Its non-regulated assets were worth $1.9 billion, including hydroelectric generation, and oddly enough, some hotels and commercial real estate.
Currently, Fortis owns and operates 23 hotels and 2.8 million square feet of commercial real estate. They are successful businesses which generated about $250 million of revenue in 2014. Fortis is considering selling all or a portion of these assets, selling shares of Fortis Properties, or an initial public offering. If so, the target is to complete this process in Q2 2015.
Fortis timed its acquisitions of Central Hudson and UNS Energy well. Fortis acquired them at a time when the Canadian dollar was at a historical high against the U.S. dollar, paying a total of US$6B between 2013 and 2014.
What to expect from Fortis
It would have been the best time to buy Fortis shares in the 2013 and 2014 period when its price-to-earnings ratio (P/E) was around 18 and 19 when it made the U.S. acquisitions.
Historically, Fortis commands a premium P/E of 20. With its current P/E at 21, it may seem Fortis shares are expensive on the surface, but the company foresees significant organic growth of about 6.5% through to 2019, compared with the historical earnings growth of 3-4%.
Fortis is also pursuing two new projects in British Columbia, the expansion of the Tilbury LNG facility, and the Woodfibre gas pipeline expansion. If these projects come into fruition, the organic growth could increase from 6.5% to 7.5%.
For the long-term investor, Fortis is a solid utility that offers a 3.4% reliable yield. That yield should grow in the 3-6% range if Fortis decides to reduce the payout ratio to retain more earnings for future growth, or if it maintains its current payout ratio level.
Fool contributor Kay Ng has no position in any stocks mentioned.