Editor’s note: An earlier version of this article misstated Fortis’ dividend. Its current yield is 3.82%. The Fool regrets the error.
Fortis Inc. (TSX:FTS) is not commonly talked about primarily because it is a utility stock, and utilities are never really exciting. The delivery of electricity is a core need, but when comparing utility stocks to gambling and telecommunications stocks, utilities are sort of boring.
Further, utility stocks don’t grow as fast as other industries, which can leave investors frustrated. However, rather than resting on its laurels, Fortis has been expanding its operation for many years now, acquiring companies all around Canada, the United States, and the Caribbean.
In Canada alone, it is the largest utility owner. Across its entire network, it serves over three million customers. The bulk of its asset mix is regulated with 70% in electricity and 26% in natural gas, while the remaining 4% is in long-term hydroelectric-generation operations.
Despite its strong position, Fortis continues to buy. It recently announced that it made an offer to buy ITC Holdings Corp. (TSX:ITC), a U.S. electricity-transmission company, for US$11.3 billion. In the U.S., ITC is the biggest pure-play electric-transmission company, which is good news for Fortis because the acquisition will give the Canadian company access to eight new states.
Short-term investors were worried about this deal because US$4.4 billion of the buying price is actually an assumption of ITC’s debt. Further, the company revealed that it would issue US$2 billion to help fund the deal. No investor likes dilution.
Here’s the good news about the deal: despite the dilution, Fortis’s management predicts that the acquisition will result in a 5% increase to the company’s earnings per share, despite the dilution. In other words, the deal will generate significantly greater earnings, even though investors are being diluted. And Fortis can be confident in that because ITC operates in regulated areas, which means that its earnings are predictable and consistent.
This should leave investors (who likely own the stock because of its incredible history as a dividend payer) feeling comfortable.
A 5% increase in EPS should allow the company to continue its goal of increasing the dividend by at least 6% every year until 2020. Presently, the dividend yields 3.82% per year and is broken up into quarterly distributions. If the company is successful in increasing the dividend by at least 6% every year, we could be seeing a dividend yield of 4.82% by 2020.
The good news for investors is that Fortis has delivered on its promise to increase the dividend every single year for more than four decades. There are very few companies in Canada that can give the same results.
So if you’re looking for a stock that is growing, adding consistent cash flow to its operation, and is committed and qualified to pay out reliable dividends, then Fortis should definitely be added to your portfolio.