Should Income Investors Buy Fortis Inc.?

Fortis Inc. (TSX:FTS) is changing in a big way, and investors want to know if the stock is still safe to own.

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Fortis Inc. (TSX:FTS) offers a stellar track record of dividend growth, but the company has changed a lot in the past two years, and investors are wondering if the good times will continue.

Let’s take a look at the current situation to see if Fortis deserves to be in your portfolio.

Earnings

Fortis delivered record net income of $589 million, or $2.11 per share, in 2015. That was $195 million, or $0.36 per share, higher than 2014.

The growth came from a number of business additions including the US$4.5 billion acquisition of Arizona-based UNS Energy and the expansion of the company’s Waneta hydroelectric facility in British Columbia.

The strength of the U.S. dollar against the loonie also had an impact. In fact, every $0.05 gain in the currency spread adds about $0.04 cents in earnings on an annualized basis.

Big deals

Earning growth is expected to continue on the back of a HUGE new purchase.

The UNS Energy deal was big, but Fortis is now swinging for the fence with its recent announcement of the US$11.3 billion acquisition of ITC Holdings Corp., the largest independent pure-play transmission company in the United States.

The market initially reacted negatively on the announcement because the deal includes the assumption of US$4.4 billion in debt. Fortis says the financing of the ITC purchase has been set up in a way that allows the company to maintain its investment-grade credit rating. This includes a sale of about 20% of ITC to minority investors.

The purchase is expected to close in late 2016, so investors should start to see the benefits in the 2017 numbers. Management expects a 5% accretion to earnings in in the first full year after the deal closes.

Dividend growth

Fortis has increased its dividend every year for more than four decades and plans to boost the distribution by 6% per year through 2020.

Should you buy the stock?

The company offers growing dividend payments supported by revenue streams that are generated almost entirely from regulated assets. This means cash flow should be both predictable and reliable.

Fortis was very successful at integrating the UNS deal, so there is a good chance the ITC purchase will work out.

If you want an income pick that you can simply buy and forget about for decades, Fortis is still a solid choice.

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 Andrew Walker has no position in any stocks mentioned.

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