Investors have been a little uncertain on how to handle the earnings release from Fortis Inc. (TSX:FTS) because there was both good and bad news mixed together. On the one hand, its adjusted earnings per share were up year over year from $0.65 per share to $0.67. However, revenue was down from $1.92 billion to $1.76 billion.
But I believe that the uncertainty is unwarranted. The reality is that Fortis is actually a great company to own, especially if you’re in the business of collecting dividend cheques. Because of its business model, cash flow is predictable, putting it in a great position to pay investors.
It is the largest utility owner in Canada while also having significant holdings in the United States. All told, it serves a total of three million customers. The bulk of its assets are regulated with 26% in natural gas and 70% in electricity. To add some diversification, 4% is in hydroelectric-generation operations.
On the surface, I don’t really like to own utilities because they bore me. They’re consistent and they can produce cash flow, but how can they grow?
But Fortis doesn’t bore me because of how acquisitive it is. In 2013 Fortis made a large US$4.5 billion acquisition for UNS Energy out of Arizona. Not wanting to stop there, it’s now looking to spend US$11.3 billion to acquire ITC Holdings Corp., the largest pure-play transmission company in the United States.
This acquisition is supposed to close later in the year. Management has suggested that this could be a 5% accretion to earnings in 2017, which provides significant growth to the company.
The ultimate reason why investors should buy Fortis is the dividend.
Right now, the company pays $0.375 per share to investors in a quarterly distribution. At present-day stock prices, that yield comes out to about 3.73%. The $1.50 per share a year alone is significant. But what’s more important is the fact that Fortis has increased this dividend every year for 43 years. In September 2015, the dividend was hiked by an additional 10.3%.
And management has revealed that it wants to continue increasing the dividend by at least 6% every single year until 2020, and I expect management will continue increasing the dividend after that. However, it’s important that the dividend hikes actually be dependable and not put the company at risk.
Fortunately, if we look at the ITC Holdings Corp. deal, I see no problem in the dividend being hiked. If management is right that the deal will provide 5% accretion to earnings, the company will only have to see a 1% increase in earnings across the rest of its operations, which it clearly can do.
Fundamentally, this company is in a solid position. It’s never going to grow like a high-flying tech stock, but because people are always going to need electricity and because it is buying up larger operations in different parts of North America, I expect that it will be able to pay slowly growing dividends to investors for years to come. It may not be exciting, but it’s most definitely dependable.